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Contingent assets and funding structures
Contingent assets and asset-backed funding structures allow sponsors to provide extra security to trustees and have become increasingly common over recent years due to economic conditions.
In simple terms, a contingent asset is an asset which remains in the employer’s control unless and until a pre-agreed “trigger” event occurs such as insolvency, at which point the asset is transferred into the pension scheme. The Pension Protection Fund (PPF) recognises certain types of contingent asset for the purposes of levy reduction but trustees and their sponsors often agree other types of contingent asset as part of broader funding negotiations.
Asset-backed funding structures typically involve the establishment of a Scottish limited partnership (SLP) into which the employer transfers assets. Those assets generate an income for the SLP. The trustee becomes a limited partner in the SLP and receives payments from it. If certain trigger events occur, the trustee can access the underlying assets. These structures are used as a funding solution and to provide additional security to trustees in the form of a ring-fenced pool of assets.
How we can help
We have advised clients on a broad range of contingent assets and asset-backed funding (ABF) structures (also known as asset-backed contribution (ABC) structures) so we understand the issues that commonly arise for both trustees and employers.
The most common types of contingent assets that we advise upon are:
- Guarantees – both in the context of PPF levy reduction and wider scheme funding support
- Escrow arrangements – involving cash and/or securities
- Asset-backed funding structures – involving a wide range of assets, including real estate, loan notes and intra-group loan obligations.
We also advise upon surety bonds, letters of credit and charges over assets such as real estate.
For more detailed commentary on the pros and cons of guarantees, escrow arrangements and asset-backed funding structures read Vicky Carr’s article: On the Trigger.
- Acting for the trustees of a FTSE 100 company pension scheme in relation to an escrow arrangement used as an alternative funding solution to limit the risk of trapped surplus in the scheme
- Advising in relation to a cash and securities escrow arrangement of c.£250 million put in place to secure a scheme’s journey to buyout
- Advising an employer in relation to a £100 million cash and securities escrow arrangement to support a defined benefit underpin
- Acting for the trustees of a large pension scheme in relation to a cash and securities escrow and letter of credit arrangement with a value in excess of £500 million
- Advising trustees on the implementation of a surety bond in replacement of a letter of credit
- Acting for pension scheme trustees and employers on PPF-form contingent assets, including Type A guarantees, Type B(i) security over cash, Type B (ii) security over real estate, Type B(iii) security over securities and Type C(i) letters of credit/bank guarantees
- Advising the trustee of a pension scheme with an overseas guarantor on bespoke arrangements to ensure the guarantor could meet its obligations on an ongoing basis which included financial covenants, an escrow arrangement and specific remedies for breach
- Acting, in conjunction with external specialists, on a real estate asset-backed funding structure with a nominal value in excess of £100 million
- Advising trustees in relation to an asset-backed funding structure involving loan notes in the context of a scheme merger
- Advising, in conjunction with external specialists, on an asset-backed funding structure involving intra-group loan obligations with a nominal value in excess of £300 million
- Acting for the trustee of the Siemens Benefit Scheme, in conjunction with external specialists, on an asset-backed funding structure involving cross-border intra-group loan obligations with a nominal value in excess of £300 million
- Advising trustee clients in relation to the certification of asset-backed funding structures for PPF levy reduction purposes
- Advising trustees on the creation of a £300 million bespoke contingent funding vehicle with standalone investment management and custody agreements.
For more information