Pensions Regulator issues guidance on the use of contingent assets

The Pensions Regulator has today issued guidance on the use of contingent assets. This is aimed at trustees who are considering including contingent assets as part of their funding strategy, and is also likely to be useful to employers and advisers.

The guidance explains that contingent assets can either support the calculation of technical provisions or underpin a recovery plan, and provides examples of where they might be used.

It also explains how trustees might use the flexibility of contingent assets in a way that can:

• improve the security of benefits for members;
• support investment in return-seeking asset classes; and
• help the employer remain viable.

The regulator's guidance encourages trustees to understand the employer's financial position and why the use of the contingent asset might be advantageous. It also seeks to help trustees identify those aspects of contingent assets on which they should take advice, and to ask appropriate questions of their advisers.

The regulator received feedback on the use of contingent assets during consultation on its approach to scheme funding, which highlighted to us that they had an interest in the possibility of using these securities and that they would welcome guidance from the regulator. The regulator's statement on How the Pensions Regulator will regulate the funding of defined benefits, published on 4 May, promised further guidance (Paragraph 4.7).

The Pensions Regulator head of policy and guidance Sue Rivas said: "We have listened to calls from industry for guidance on the inclusion of contingent assets in scheme funding.

"The new guidance provides a framework for uses of contingent assets in scheme funding likely to be acceptable to the regulator. We hope that the flexibility provided by contingent assets in appropriate cases will help trustees and employers find mutually acceptable solutions to some of the more difficult funding issues they may currently be facing".

1. The guidance on the use of contingent assets can be found on the regulator's website http://www.thepensionsregulator.gov.uk/guidance/monitoring-employer-support.aspx
2. The Pensions Regulator has published two documents which refer to the possibility of including contingent assets as part of a scheme's funding strategy. These are the Funding defined benefits code of practice and the statement on how the Pensions Regulator will regulate the funding of defined benefits. Both can be viewed on the regulator's website.
3. The new scheme funding requirements are part of wider reforms set out in the Pensions Act 2004. Elements of the scheme funding provisions take account of the funding requirements in Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision.
4. 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 http://www.pensionprotectionfund.org.uk/
5. The Pensions Regulator is the regulator of work-based pensions in the UK, with wide ranging and flexible powers under the Pensions Act 2004.
6. The powers of the Pensions Regulator include the ability to:
   • collect more detailed scheme information;
   • issue improvement notices and third party notices, enabling the regulator to ensure problems are put right;
   • freeze a scheme that is at risk, while the regulator investigates; and
   • prohibit trustees who are judged not fit and proper to carry out their duties.
   • The Pensions Act 2004 also imposes a statutory obligation on 'whistleblowers' to report suspected breaches of the legislation to the regulator.

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