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Contingent Assets: Basics
Contingent assets are assets held outside a pension scheme which the scheme can claim on when one or more specified “trigger” events occur (such as the insolvency of the sponsoring employer). They can be useful for trustees and employers as an alternative to hard cash in relation to scheme funding and also as a way in which to reduce a scheme’s Pension Protection Fund (PPF) levy.
The Pensions Regulator (TPR) recognises that trustees can make use of contingent assets to increase the security of members’ benefits. For example, they can be used to support the scheme’s technical provisions and/or a recovery plan.
TPR has published guidance explaining the approach trustees are expected to take when considering the inclusion of contingent assets as part of a scheme’s funding strategy.
The PPF will take account of the following types of contingent asset when calculating the amount of risk-based levy payable by a scheme (for further details on the pension protection levy see Pension Protection Fund: Levies):
- Guarantees given by a parent or other group company;
- Security over cash, real estate and securities; or
- Letters of credit and bank guarantees.
A contingent asset must be in the PPF’s standard form and be certified by the PPF in order for it to be taken into account for the purpose of the levy.
Although TPR’s guidance is generally consistent with that of the PPF, the two bodies have different aims and roles and therefore a different approach to the subject. Trustees and employers should not assume that if a contingent asset is suitable for one purpose it will automatically be acceptable for the other.
Author: Nigel Cayless