Crisis allowed trustees to tap contingent assets
UK - The use of contingent assets has grown by 30% in the past year as UK defined benefit pension schemes grappled with some of the worst funding levels since records began.
The Pension Protection Fund (PPF) Purple Book 2009 revealed deficits had reached £200bn (€228.75bn) in March 2009, having enjoyed a surplus of £12.3bn the previous year, and forced trustees and employers to implement more risk reduction measures.
Contingent assets are also seen as playing a key role in minimising the amount DB schemes are obliged to pay in PPF levies. The lifeboat fund revealed that the 587 contingent assets in place for 2009/10 reduced the respective schemes' levies by around £100m (€114.3m).
"While the principal driver will be improving security for schemes, the growth in contingent assets is no doubt strongly influenced by the PPF levy, as contingent assets have the potential to substantially reduce a scheme's bill," the PPF said.
Under PPF definitions, contingent assets fall into three categories: company guarantees to pay into the scheme should funding fall below a certain point; security over holdings of cash, real estate or securities; and letters of credit and bank guarantees.
Danny Vassiliades, head of corporate advice at Punter Southall, said these strategies offer a way to secure a scheme's funding needs, without draining the sponsoring employer's limited cash reserves.
"The growth in contingent assets reflects the fact that a lot of employers are reticent about putting cash in a scheme that they will never see again.
Lots of companies are trying to keep hold of cash while satisfying their funding obligations by giving trustees a charge over assets," he said.
According to the PPF, the growth in contingent assets reflected its commitment to promoting risk and levy reduction measures for DB plans.
A spokesman for the fund told IPE: "We recently reviewed the contingent asset system to ensure it remains fit for purpose in a changing environment, and asked for views on its findings as part of the consultation on the 2010/11 levy."
He added: "We promote contingent assets via our regular speaking engagements at seminars and conferences around the country, where we include details of common mistakes and ‘dos and don'ts' to help trustees and their legal advisers."
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