The Pensions Regulator

Contingent assets

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The regulator's and the Pension Protection Fund's approaches

5. Both the Board of the Pension Protection Fund ('the Pension Protection Fund') and the regulator acknowledge that trustees could make use of contingent assets to increase the security of members' benefits. The Pension Protection Fund recognises this additional security by reducing the risk-based levy. The regulator recognises that trustees may make some allowance for this additional security as part of the scheme's funding strategy.
6. The Pension Protection Fund has published its own documentation and guidance as to the contingent assets it will recognise when calculating each scheme's risk-based levy for 2006-7. For more information on this, see the Pension Protection Fund's website at: www.pensionprotectionfund.org.uk/index/risk-based_levy.htm.
7. The regulator's guidance is generally consistent with that of the Pension Protection Fund. With a few exceptions, contingent assets recognised by the Pension Protection Fund are a subset of those that might be included in a scheme's funding strategy. Both the regulator and the Pension Protection Fund emphasise the importance of the trustees in forming a judgement about the appropriateness of a contingent asset.
8. In some respects the regulator is taking a slightly different approach to the Pension Protection Fund. To appreciate why this is the case it is necessary to understand the different aims and roles of the Pension Protection Fund and the regulator. In summary, while the Pension Protection Fund is concerned with what happens if a sponsoring employer becomes insolvent, the regulator has a broader role.
9. The Pension Protection Fund is concerned with what happens if a sponsoring employer becomes insolvent. In setting its risk-based levy, the Pension Protection Fund is using insurance principles based on the amount at risk and the probability of that risk materialising. Use of contingent assets which reduce the amount at risk to the Pension Protection Fund may reduce the amount of the risk-based levy payable.
10. The Pension Protection Fund has concluded that a degree of standardisation is needed in setting its conditions of acceptability for contingent assets. This allows an assessment to be made on a consistent, clear and straightforward basis.
11. By contrast, scheme funding is not such a precise concept. Here judgement is essential and the new scheme funding regime gives this responsibility to trustees, although employer agreement is usually required. The regulator does not have a formal approval role and does not have to place its own value on any contingent asset.
12. Decisions on funding strategy, including the role played by contingent assets, must take account of the scheme's circumstances. Accordingly, the regulator's role is to highlight those matters trustees should bear in mind when considering contingent assets as part of a scheme's funding strategy. It would not be appropriate for the regulator to use a standardised approach.
13. The differences between contingent assets used as part of a scheme's funding strategy and those which the Pension Protection Fund permits may fall into either or both of the following types:
    • the contingent asset triggering event may be different. For the Pension Protection Fund, the main concern is with employer insolvency whereas for funding purposes, triggering events could relate to a scheme's funding level or failing to achieve pre-specified investment returns;
    • the period for which a contingent asset is in place. It may be appropriate for the Pension Protection Fund but may not be appropriate to support a scheme's longer-term funding plan (and vice versa).
14. Given these differences, trustees and employers should not assume that if a contingent asset is suitable for scheme funding purposes it will automatically be acceptable to the Pension Protection Fund (and vice versa). If the trustees (and employer) wish the contingent asset to be included as part of a scheme's funding strategy and also for it to be recognised by the Pension Protection Fund then they should use the Pension Protection Fund's standard forms and guidance as the starting point for discussion. The Pension Protection Fund's guidance allows for some variation from the standard forms, and this flexibility might enable a contingent asset designed to support the scheme's funding strategy also to be acceptable to the Pension Protection Fund.
15. To help the reader identify where differences between the regulator's and the Pension Protection Fund's approaches might be relevant, a  flag is placed at appropriate points in the text of this guidance.

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