Contingent Assets

There has been steadily increasing talk in the pensions industry recently of surpluses. What is more, this talk has not been romantic reminiscing of a bygone age but has been considering the current or readily anticipated funding situation of many occupational schemes. Indeed, it has been claimed that the FTSE 100 no longer has a pensions deficit (although, of course, much depends on which method of valuing liabilities one is comparing funding against).

Wonderful news, you might think. A fantastic opportunity to make pension schemes solvent to such an extent that deficits could only arise again in the most extreme circumstances. It would not appear so. Understandably, employers are rather reluctant to keep pumping millions, if not billions, of pounds into a benefit arrangement that might have little relevance to current employees who are busy finding out how their money purchase pots are performing. So how are employers balancing the requirements of trustees against their concern to avoid what they see as the threat of overfunding and trapped surpluses? The answer is, quite overwhelmingly, contingent assets.

There is another aspect to this. The Pension Protection Fund (PPF) is, so some people say, taking money from those employers that are doing well in order to pay for the pension promises other employers have made but which they cannot afford. Again, one can ask what have employers been doing to reduce the annual premium they must pay to the PPF and, again, the answer is contingent assets.

There are now a range of contingent assets that are commonly used in relation to occupational pension schemes. As the name suggests, these are assets which are not placed within the pension scheme immediately but which will be placed within the scheme on the occurrence of certain, pre-defined events.

Escrow Accounts

Pension scheme trustees would probably like to receive cash from their sponsoring employers more than anything else. However, if that is not possible, placing the cash in a designated account, an escrow account, on the basis that it will be paid to the trustees in the future should they need it comes a pretty close runner-up. Unlike most other types of contingent asset, escrow accounts can be used as part of the general funding programme for a pension scheme and need not simply come into play on the insolvency of the sponsoring employer. That said, typically, the trustees will be given security over the escrow account so that they will...