The Pensions Regulator

Contingent assets

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Examples of contingent assets which trustees may find appropriate to support a scheme's funding strategy

25. Some examples of the forms of contingent assets that are widely used commercially are:
    • sterling cash put aside in a bank account and charged to the fund. Some or all of the cash would be released to the fund on the occurrence of the contingent event(s);
    • security over other assets (for example property or securities) such that the asset is transferred to the trustees if the contingent event occurs;
    • the provision of a group company guarantee such that the guarantor agrees to make a payment (or series of payments) to the scheme if the contingent event occurs. Although the guarantee may not be expressed as time-limited, trustees should only rely on it for relatively short periods (for example three years or less) - see paragraph 46;
    • a letter of credit or a guarantee (eg a bank guarantee) from a third party such that if the employer were to default on payment of contributions to the scheme, money can be drawn against the third party up to a specified amount.
26. Some forms of contingent asset require a financial institution to act as a third party. Where this is the case, for the trustees to rely on the value of the contingent asset, the financial institution should ideally be rated as AA- (or equivalent) or higher as well as be regulated and located in an OECD (Organisation for Economic Co-operation and Development) group member. Should the trustees choose to use a financial institution with a rating below AA- they should make themselves aware of any additional counterparty risk that may result.
27. Trustees need to consider the appropriateness of the contingent asset in relation to the support it is providing to the scheme's funding strategy. For example, where the contingent event is the failure to achieve some specified investment return, the contingent asset needs to be sufficiently flexible and realisable as to make up the actual underperformance. In such a case, cash in an account charged to the scheme is likely to be more suitable than a charge over property.

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