UK: Contingent Assets

Last Updated: 9 November 2007
Article by Wendy Hunter and Fraser Sparks

There has been steadily increasing talk in the pensions industry recently of surpluses. What is more, this talk has not been romantic reminiscing of a bygone age but has been considering the current or readily anticipated funding situation of many occupational schemes. Indeed, it has been claimed that the FTSE 100 no longer has a pensions deficit (although, of course, much depends on which method of valuing liabilities one is comparing funding against).

Wonderful news, you might think. A fantastic opportunity to make pension schemes solvent to such an extent that deficits could only arise again in the most extreme circumstances. It would not appear so. Understandably, employers are rather reluctant to keep pumping millions, if not billions, of pounds into a benefit arrangement that might have little relevance to current employees who are busy finding out how their money purchase pots are performing. So how are employers balancing the requirements of trustees against their concern to avoid what they see as the threat of overfunding and trapped surpluses? The answer is, quite overwhelmingly, contingent assets.

There is another aspect to this. The Pension Protection Fund (PPF) is, so some people say, taking money from those employers that are doing well in order to pay for the pension promises other employers have made but which they cannot afford. Again, one can ask what have employers been doing to reduce the annual premium they must pay to the PPF and, again, the answer is contingent assets.

There are now a range of contingent assets that are commonly used in relation to occupational pension schemes. As the name suggests, these are assets which are not placed within the pension scheme immediately but which will be placed within the scheme on the occurrence of certain, pre-defined events.

Escrow Accounts

Pension scheme trustees would probably like to receive cash from their sponsoring employers more than anything else. However, if that is not possible, placing the cash in a designated account, an escrow account, on the basis that it will be paid to the trustees in the future should they need it comes a pretty close runner-up. Unlike most other types of contingent asset, escrow accounts can be used as part of the general funding programme for a pension scheme and need not simply come into play on the insolvency of the sponsoring employer. That said, typically, the trustees will be given security over the escrow account so that they will have first call on the cash should the employer become insolvent.

Employers will be attracted to this approach if they take the view that any deficit in the pension scheme is likely to be funded by investments outperforming liabilities. The arrangement will define certain trigger events that would result in money from the escrow account being paid into the scheme provided that, at that time, the scheme is underfunded on whatever basis has been agreed. That said, for this to be a viable option, the employer must normally have a significant amount of spare cash available which it can lock away in an escrow account for a number of years. In addition, the employer will receive no tax relief on the cash it places in the account unless and until that money goes into the pension scheme.

Security Over Assets

If the employer does not have the spare cash necessary to make it commercially worthwhile setting up an escrow account, it may have other assets, typically land or buildings, which can be charged to the pension scheme. Normally, such arrangements are set up on the basis that the asset would only be transferred to the trustees if the employer becomes insolvent. After all, a successful business is unlikely to want to be evicted from its premises by its pension scheme trustees simply because the pension scheme is not fully funded. For this reason, this type of contingent asset is generally used, primarily, in order to reduce the pension scheme’s levy to the PPF. However, charges could be used by an employer in order to justify a longer recovery period under the scheme’s funding arrangement than might otherwise be acceptable to the trustees.

Of course, if the asset over which a charge is granted is property or some other non-cash asset the value of which will vary from time to time, the trustees will need to value it regularly. A mechanism could be put in place whereby the employer will have to pay additional contributions or provide additional security if the value of the charged asset falls below a particular level. Another point for the trustees to consider is the cash flow of the pension scheme as, clearly, this will not be assisted by a charge over the employer’s assets.

From an employer’s point of view, if it has available an asset which can be charged to the trustees, this can be a relatively pain-free method of reducing its contributions to the scheme while at the same time reducing the pension scheme’s PPF levy.

Letters Of Credit

A letter of credit is an arrangement whereby an employer can purchase protection against the risk of its insolvency for the benefit of the pension scheme trustees. The employer will enter into a contract with a bank or insurance company whereby, for a fee, the bank or insurance company will pay an agreed sum of money to the pension scheme trustees on the employer’s insolvency.

This can be a relatively cheap method of the employer deferring the payment of cash into the pension scheme and reducing the pension scheme’s PPF levy. The fee should also be tax deductible. However, the letter of credit will generally be treated as borrowing by the employer and so it could increase the cost of any subsequent debt the employer wishes to take on.

Trustees are generally receptive to funding arrangements involving a letter of credit. However, as with charges over assets, the trustees must ensure that the pension scheme has sufficient cash flow to meet its liabilities as they fall due.

Group Guarantees

Group guarantees have proved a very popular method of reducing pension schemes’ PPF levies. A sponsoring employer which is part of a wider corporate group and which does not have a particularly favourable failure score may be able to reduce the levy by the relatively simple process of obtaining a guarantee from another group company which has a more favourable failure score. This has been seen by many corporate groups as an obvious way of saving money but the would-be guarantor should first ensure that providing the guarantee will not have any adverse financial and/or accounting implications.

Such guarantees may not, however, have a material effect on the trustees’ approach to the statutory funding objective. This is mainly because the trustees might already be taking into account the financial strength of the wider corporate group on the basis that, if the sponsoring employer became insolvent, the Pensions Regulator could issue a financial support direction in order to make the wider group directly liable to fund the pension scheme’s liabilities. As such, this type of guarantee may not convince the trustees to accept a longer recovery period than would otherwise be the case.

Impact Of PPF Levy Documents

In order for a contingent asset arrangement to be taken into account by the PPF when calculating the levy, it must be entered into on the PPF’s standard form documentation. Even if an employer’s primary reason for offering a contingent asset arrangement to the pension scheme trustees is funding rather than to save on the levy, the employer is still likely to want the arrangement to be taken into account by the PPF so that it gets maximum value from the arrangement.

The PPF’s approach has, therefore, assisted pension scheme trustees no end as it has taken away much of the scope for negotiating these arrangements. Employers should take particular care, however, with the PPF standard documents as, once put in place, they can be very difficult to bring to an end.

Investment Strategy

Another issue that is becoming increasingly common when an employer suggests a contingent asset arrangement is the trustees’ investment strategy. Legislation makes it clear that a pension scheme’s investment strategy is solely in the hands of the trustees but a contingent asset arrangement can be used by employers to exert some control over the trustees’ decision. For instance, an escrow arrangement might be made subject to the trustees continuing to invest, say, 80% of the pension scheme’s assets in equities. The decision to maintain that investment strategy continues to rest solely with the trustees but they would have to bear in mind that, should they decide to move away from that strategy, they will lose the benefit of the escrow arrangement.

Any such conditions which are proposed by the employer will have to be considered carefully by the trustees in order to ensure they are not fettering their discretion or granting the employer control over the pension scheme’s investments.

In summary then, contingent assets can be very useful for employers who either do not wish to pay large sums of money directly into their pension schemes or cannot do so. Contingent assets can also be used very effectively to reduce a pension scheme’s PPF levy. Whatever the primary reason for a contingent asset arrangement, both employers and trustees should consider carefully how it fits into the wider arrangements for funding the pension scheme and also the pension scheme’s investment strategy.

Key issues:

  • What is the main purpose for putting the contingent asset in place?
  • Would it be better simply to pay contributions into the pension scheme?
  • Which type of contingent asset is most appropriate?
  • Can the contingent asset arrangement be used by the employer to exert some control over the pension scheme trustees’ investment strategy?

This article first appeared in the August edition of Pensions World. The article has been reproduced by kind permission of the publishers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.