Managing contribution requirements through downside contingency planning

The background

The scheme was sponsored by an underperforming UK subsidiary of a strong overseas parent. The parent was already investing heavily in the UK business, and did not want to use up further cash making additional contributions into the pension scheme. The trustees wanted to agree a contingency plan that would guarantee future contributions, even in downside scenarios.

Our solution

The Trustees agreed to target relatively high levels of investment return, and reflect this in the valuation assumptions. The deficit was spread over 10 years.

To support this risk a 10 year parent company guarantee was provided, capped at the buy-out deficit at the valuation date, and the following contingency plans were agreed:

• As long as the trustees continued with the agreed approach to funding, then at each future valuation the guarantee would be reset at the then buy-out deficit and extended back out to 10 years.
• Deficits would be respread over a 10 year period at each valuation. This applies whether the deficit was lower or higher than expected.
• If the trustees complied with the requirements above, but the employer did not renew the guarantee, then that would trigger a very significant cash payment into the plan.
• If the guarantor’s credit rating fell below BBB+, then there would be an immediate and automatic increase in employer contributions.

All of this was comprehensively set out in legally binding documentation.

The results

The trustees were confident that the scheme was protected in downside scenarios and the employer was able to pay relatively low deficit contributions.