The Pensions Regulator

Contingent assets

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How to place a value on a contingent asset

39. The trustees will need to consider the value they are to place on the contingent asset. For some, such as cash in a designated account, this will be straightforward but for others, such as property or a group company guarantee, careful consideration will be needed before allowing for the contingent asset in a scheme's funding strategy.
40. For some forms of contingent asset, the current value is not publicly available (eg for a property). In such cases, the trustees will need a qualified professional to provide an assessment of the current open market (or forced sale, if appropriate) value of that asset.
41. There may be a time delay between the date the contingent event occurs and the trustees receiving the asset. Additionally, the amount they receive may be different from the current value of that asset. Due to these issues over timing and uncertainty of amount, the trustees may need to reduce the estimated value of the contingent asset before taking it into account. The trustees should carefully consider the specific circumstances of the scheme and the sponsoring employer. As part of this, the trustees should bear in mind the following:
42. • the contingent event may not occur for some time; and
    • the value of the contingent asset may be lower at the time of the contingent event than the current value (for example a single purpose property may have a significantly lower value following an employer insolvency).

Group company guarantees

42. Where the contingent asset takes the form of a group company guarantee, the trustees should take advice from a professional qualified to assess the relative strengths of the covenant of the employer and the guarantor. The code of practice provides further guidance to trustees in assessing the strength of an employer's covenant.¹
43. The trustees should keep the guarantee under regular review. For example, they may choose to review the guarantee as and when they become aware of any significant events that could impact on the covenant of the guarantor. The professional advice relating to the guarantee should be reviewed regularly too. This could be done at the time trustees become aware of significant events that may influence that advice and/or when the employer publishes its annual report and accounts.
44. Where a group company guarantee is being provided, this should only be taken into account if the company providing the guarantee is located in an OECD country.
45. Trustees should ensure that the agreement binds the guarantor to notify the trustees of specified relevant events in relation to the guarantor, and which might affect the guarantor's ability to honour the guarantee. These specified relevant events should normally include any 'notifiable events'². The trustees should use this information as an early warning system to alert them to any difficulties the guarantor finds itself in and then take appropriate action.
46. The trustees should normally only allow a company guarantee as part of the scheme's funding strategy for relatively short periods (eg for three years or less) even though the guarantee may have been offered for a longer period. The reasons for this are:
    • the value of a company guarantee can reduce significantly even over relatively short periods; and
    • the triennial valuation process provides a natural point for the trustees to reconsider the role of the group company guarantee in a scheme's funding strategy.

    Given this, a company guarantee would not normally be suitable to support an extended recovery plan but could be used to support a back-end loaded recovery plan.

Providing information to the regulator

47. The trustees should be aware that they may be asked to provide the regulator with copies of any contingent asset agreements they are party to and any related advice they have received.

1. See paragraphs 57 to 60 of Regulatory Code of Practice No 3, Funding defined benefits.
2. See Regulatory Code of Practice No 2, Notifiable events, and The Pensions Regulator (Notifiable Events) Regulations (SI 2005/900).

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