The Pensions Regulator

Contingent assets

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Appendix A: Case studies

Below are three short hypothetical case studies illustrating how a contingent asset might play a valuable role in a scheme's funding strategy. These examples are not meant to be exhaustive, nor must trustees adopt any of these approaches for their own schemes without being satisfied that they are appropriate in their case.

Case 1

There is a significant deficit in the scheme compared to the free cash flow the employer expects to generate in the medium term such that the recovery plan would need to extend to 15 years. The employer has a substantial unencumbered property asset in the form of its premises.

In this case the trustees might agree to the 15 year plan if the trustees were to be given a charge over the employer's premises of an amount equal to the deficit.

As an alternative, the employer could consider raising cash in the capital markets using its premises as security.

Case 2

There is a deficit in the scheme and a recovery plan is needed. The employer would like to see the trustees continuing with an investment strategy having a higher weighting in equities than is implied by the calculation of their technical provisions and would like to see this reflected in the assumptions underlying the contribution requirement over the period of the recovery plan. The effect of doing so would be to reduce the contribution requirement or to shorten the plan.

The employer's covenant is not deemed strong enough on its own to warrant this in the opinion of the trustees: however, the employer is part of a group with much stronger companies in it. In this case the trustees might agree to the employer's request where an intra group guarantee was provided, structured in such a way that if investment performance was lower than the assumption used for the recovery plan, cash would be paid to the scheme under the terms of the guarantee.

Case 3

There is a deficit in the scheme and the employer has what are expected to be short-term liquidity problems but anticipates disposing of a substantial asset within the next two years. The employer proposes a recovery plan whereby contributions are nil for two years, followed by a payment at the end of those two years of an amount at least equal to the payments that would otherwise have been made.

The trustees might accept the proposed schedule where the employer arranged a letter of credit in favour of the scheme, for a period of no less than three years, of an amount no less than the two years' deferred contributions. A reasonable period of overlap will enable trustees to pursue any unpaid contributions whilst still benefiting from the insolvency cover.

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