Contingent assets can offer highly valuable support to defined benefit (DB) pensions scheme – but how do you know if they'll be a panacea or an empty promise? Luke Hartley introduces our latest research on their value and pitfalls in supporting DB pension schemes.
Continent assets can be used to support a valuation funding plan, provide mitigation for covenant detriment or, increasingly, help support a glide path to a scheme's 'endgame'. Structures such as guarantees, asset security, escrow accounts and other forms of collateral have featured in the toolkit of some trustees, sponsors and their advisers for years. Given sponsors’ desire to avoid trapped surpluses, their use is likely to increase over time.
But there are a number of pitfalls that may catch the unwary, and trustees and sponsors must be alive to these when considering such mechanisms against a simpler, but less flexible, cash arrangement.
Our new report, “Panacea or empty promise?”, produced in conjunction with Baker McKenzie, critically evaluates the different types of contingent assets from both core commercial and legal perspectives. It highlights the benefits, and how and when contingent assets can be used, and considers the potential weaknesses or problems that can lead to unfortunate surprises.
As the nature, form and use of various forms of contingent assets to support UK DB pension schemes evolves, the need to understand them also grows. Stakeholders need to know which mechanisms to use, where they are most attractive and when they may end up serving little or no purpose.
For more insight and guidance, contact Luke Hartley.
