In the best-selling book and immensely popular film “Playing the Moldovans at Tennis” Tony Hawks tests the thesis that a person who is well drilled in a particular sport or activity will have little difficulty beating opponents who are well drilled in another unrelated sport or activity. Hawks puts the theory to the test by reference to his own background in lawn tennis and the anticipated unfamiliarity of the Moldovan national football team with the same. No spoilers, but in the run-off stage of UK defined benefit pension schemes, a similar visitation from other fields of expertise and human endeavour can be observed, if only infrequently at present. An example is the surety market coming to the aid of the pensions industry.
Trustees of UK defined benefit pension schemes, encouraged, if not quite roared on, by the Pensions Regulator, seek contingent assets which vest in the event that the scheme sponsor is no longer able to support the scheme. Contingent assets usually fall into fairly tried and tested categories. For example, security over assets such as land (a typical example being the sponsor’s business premises), a variety of financial instruments like letters of credit, escrow account or other similar arrangements, asset backed funding strategies and the support of third party guarantees of the sponsoring employer’s liabilities to the scheme.
Sometimes a swathe of contingent assets is provided under an agreement between sponsor and trustees with restrictions on the quality and type of asset which can be provided up to pre-agreed limits. Such agreements frequently seek to strike a balance between the trustee need for security in the event of sponsor insolvency and the sponsor group’s desire for freedom of movement of assets in and out of the arrangement to take advantage of market opportunities. For example, when market conditions change, a sponsor may wish to substitute a more expensive contingent asset with a less expensive asset but which provides equal liability coverage. The securitisation agreement should provide for this, subject to satisfying any trustee concerns.
The surety market has in recent years become a very effective and efficient supplier of contingent asset solutions to pension schemes. Sureties are well drilled at stepping into the shoes of a primary obligor, like a pension scheme sponsor, to fulfil obligations which cannot be met by the primary obligor due to insolvency. The construction of the built environment has depended upon surety market expertise for many years. In a parallel to Tony Hawks’ tennis challenge to established football players, the expertise of sureties has enjoyed significant success in recent years in pension scheme contingent asset provision, especially in the context of securitisation packages.
This blog post was written by Patrick Kennedy. For further information, please contact:
Patrick Kennedy, partner, Pensions
T: 0161 836 7788