Are your pension scheme's contingent assets a "turkey"?

In 2016 the Bernard Matthews pension scheme started heading towards the PPF. This followed a corporate takeover that excluded the pension scheme. Whilst the Bernard Matthews scheme had a charge over company assets, any asset recovery for the pension scheme is now expected to be minimal.

Contingent assets, in their various guises, have increased in popularity and in many cases are extremely valuable for a pension scheme. However, in exchange for receiving a contingent asset, trustees often give something up. For example, they might accept: 

  • lower contributions than would otherwise be the case
  • a riskier investment strategy, hoping to achieve a higher rate of investment return.

The PPF realised this was an issue for them a few years ago. Many companies had used PPF guarantees from companies with a higher D&B score to reduce their PPF levy. However, some of these guarantor companies would not have been able to support the pension scheme, if required. Therefore, the PPF tightened the requirements for PPF guarantees and now these are less prevalent.

So what can trustees do? 

From a trustee perspective, the trustees need to ask whether the value of the contingent asset justifies the exchange. Importantly, in this exchange trustees are giving up something today, for a contingent asset that may be required at some time in the future. So it is not just the value of the contingent asset today that is important.

When accepting contingent assets, trustees should think critically about what value it may be expected to deliver, particularly in a stressed or distressed situation. This assessment shouldn't just take place on day one, but regularly after that to ensure that it remains "fit for purpose".

What if the perceived value of the contingent asset falls? Perhaps trustees should consider whether a trigger limit should be set. If the perceived value of the contingent asset falls below this trigger, the company would be required to replace the contingent asset.

As a trustee, your advisers will be important here in helping to think about the pros and cons of any particular contingent asset, the value it may deliver in a stressed / distressed situation and what trustees should then be willing to trade for that contingent asset.

The PPF learnt its lesson, we as trustees should do so too.

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