Contingent assets

Uncertain economic conditions have lead trustees and sponsors to search for more innovative funding arrangements as DB pension scheme deficits have increased.

Our team of finance and investment specialists regularly advise trustees and sponsoring employers on a broad range of contingent assets. Whilst, from a trustee perspective, cash will always be King, employers may not be able to provide cash at the level or over the time period that ideally trustees would like. A contingent asset can represent a workable compromise in the context of scheme funding.

Guarantees, escrow arrangements, letters of credit, surety bonds and legal mortgages are all common types of contingent assets. Asset-backed funding structures can be used both as a means of funding a pension scheme deficit and as a contingent asset.

Contingent assets can also be used as covenant support where an event, such as a corporate takeover, restructuring or sale, impacts the employer covenant.

Certain types of contingent assets are recognised by the PPF and may result in a reduction in the PPF levy payable in respect of the relevant pension scheme.

We advise on all of these solutions so we understand the issues that commonly arise for both trustees and employers, as well as how to negotiate and address them.

Recent experience

  • Acting for the trustee of a multi-billion pound pension scheme on the provision of cash and gilts escrow arrangements, letters of credit, surety bonds and negative pledges in the context of a scheme sectionalisation
  • 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 an employer in relation to a £100m cash and securities escrow arrangement to support a defined benefit underpin
  • Acting for the trustee of a pension scheme in relation to the provision of wider covenant support from an overseas group in the context of a corporate takeover
  • 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
  • Advising trustees on the creation of a £300m reservoir trust with standalone investment management and custody agreements
  • 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.