Contingent assets help reduce risk and Pension Protection Fund levies. We can draft the documents you need. Call us on 0118 958 0224 for details.
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A contingent asset in the pensions context is an asset that is not immediately available to the scheme trustees, but which will become available if one or more specified events occur, such as:
- The employer becomes insolvent
- The scheme fails to achieve a specified funding level
These assets only become available once a trigger event has occurred and the claim has been made. They are not available in the normal course of running the scheme. Because of this, a contingent asset does not count as a scheme asset in assessing whether the scheme has sufficient assets to cover its technical provisions and so meet the statutory funding objective under the Pensions Act 2004. It can, however, be taken into account in assessing an employer’s covenant towards a scheme.
Examples of contingent assets include:
- Cash in a bank account that is charged to the scheme
- Security over other assets (for example, property, business assets or securities owned by the employer)
- Group company guarantees (for example, given by the employer's parent company)
- A letter of credit issued by a bank
Using a contingent asset may help mitigate the financial burden on the employer, particularly if cash resources are limited or it is seeking to use cash elsewhere in its business. Where cash is not immediately available, a contingent funding arrangement helps the trustees to accommodate the employer’s views on certain aspects of the scheme's funding or investment strategy, e.g. if the employer can provide some form of protection to the trustees for the extra risk they are asked to assume.
Additionally, both the Pensions Regulator and the Pension Protection Fund recognise the role that contingent assets play in improving the security of members' benefits:
- The Regulator accepts that trustees may include contingent assets as an element of their scheme's funding strategy
- The PPF takes appropriate contingent assets into account in calculating the scheme's risk-based levy, provided the assets meet certain conditions (including that they are set up using standardised PPF documents)
Why Choose Pitmans' Guarantees, Securities & Charges Lawyers?
Pitmans’ Guarantees, Securities & Charges lawyers can:
- Draft documentation to establish a contingent asset
- Draft associated documentation, eg deeds of priority or inter-creditor deeds
- Apply to the PPF for recognition of the contingent asset if appropriate
- Advise trustees on the validity and effectiveness of the contingent asset and the implementation process