We recently advised a client that was looking to develop a comprehensive financial management plan for the scheme, targeting a fully de-risked and liability matched investment strategy in the mid-2020s and thereafter moving on to buy-out.
This plan aimed to strike a balance between the trustees’ desire to reduce risk, and the employer’s business needs.
As part of the plan the trustees and employer agreed to the following:
A parent company guarantee was provided to the trustees to give the trustee greater comfort on the covenant.
Agreed deficit spreading
Any deficits that arise at future actuarial valuations are spread over a pre-agreed period.
Contributions payable to the scheme would be significantly accelerated if certain covenant triggers were hit. These triggers included:
- triggers based on company accounting ratios;
- loss of the company’s investment-grade credit rating; and
- a significant movement of assets out of the group.
From the company’s side, there are mechanisms that will allow any accelerated contributions to be recovered if, for example, the investment-grade credit rating is regained.
Further regular contributions are paid into an escrow account, and in the event that the remaining growth-seeking assets underperform, this money is moved into the scheme. As well as protecting the scheme, this also protected the employer from the risk of overfunding.
Contributions can also be made as ‘loans’ to the scheme once the funding level is close to 100% on the de-risked basis to avoid the risk of overfunding.