The Pensions Regulator

Contingent assets

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Examples of when contingent assets might be appropriate as part of a scheme's funding strategy

20. There is a range of circumstances in which contingent assets, though not in fact assets of the scheme, may provide trustees with additional comfort when establishing the scheme's funding strategy. Contingent assets could be used to support the technical provisions and/or a recovery plan.
21. Examples of how contingent assets may support technical provisions:
    • a contingent asset may allow the trustees to pursue an investment strategy which includes investing a proportion of the scheme's funds in return-seeking assets (eg equities) that is higher than they would otherwise wish to hold. This investment strategy may in turn lead to lower technical provisions if some credit is taken for the anticipated higher returns. An appropriately structured contingent asset may provide protection to the scheme against the risk that scheme assets do not provide the anticipated excess returns;
    • a contingent asset may allow the trustees to increase their assessment of the excess returns any return-seeking assets will achieve. An appropriately structured contingent asset may provide protection to the scheme against the risk that scheme assets do not provide the anticipated higher excess returns;
    • a contingent asset may provide the trustees with security against the possibility of falls in a scheme's future funding level even if the scheme is currently fully funded.
22. Examples of how contingent assets may support a recovery plan:
    • contingent assets can provide the trustees with security against employer default during the term of a recovery plan;
    • where the employer's contribution payments in a recovery plan are back-end loaded, an appropriately structured contingent asset can provide the trustees with security against employer default during the period in which the employer's cumulative contributions remain below the level at which they would otherwise have been without the introduction of the back-end loading;
    • an appropriately structured contingent asset can provide security against the possibility of the actual investment returns being less than those assumed for the purposes of the recovery plan;
    • in some cases, the ability of the employer to make good a funding shortfall, combined with the extra security for members' benefits afforded by the existence of the contingent asset, may lead the trustees to accept a recovery plan structured in a way they would not otherwise have accepted.
23. The examples of how contingent assets can be included as part of a scheme's funding strategy, as set out in paragraphs 21 and 22 above, are not exhaustive. Three hypothetical case studies showing how contingent assets might be included as part of a scheme's funding strategy are included in Appendix A.
24. Care is needed by trustees not to double count the support provided by a contingent asset. For example, if a contingent asset is supporting a back-end loaded recovery plan, then the same contingent asset should not usually support any other aspect of the scheme's funding strategy unless it is adequate for both purposes.

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