A number of regulatory and economic factors including a tougher line on scheme funding from The Pensions Regulator (TPR) means interest in the use of contingent strategies will grow, Lane Clark & Peacock (LCP) finds.
Scheme funding research from the consultancy - released today (14 August) - suggested sponsors who can bring contingent funding deals to the table may come under less pressure to de-risk or increase contributions.
This may be most relevant to schemes that expect to use the bespoke framework under TPR's new twin-track funding code approach, it stated.
Despite coming in a range of forms, contingent funding arrangements most often involve a company agreeing to contribute more to its pension scheme if certain triggers are reached.
LCP partner Phil Cuddeford said: "Many firms will be under considerable pressure to use their available funds to keep their business going during the current crisis, but will also be under growing pressure from TPR to deal with the shortfall in their pension scheme [and] contingent funding is a way of squaring this circle."
Another reason noted for a potential increase in a contingent structure was the risk of higher Pension Protection Fund levy payments.
"Especially where the current [Covid-19] crisis has led to higher deficits and/or weaker sponsor covenant," LCP said. "Pound for pound, a contingent asset can potentially lead to greater levy savings than in the past."
Around 10% of employers have negotiated reduced deficit reduction contributions since the start of the coronavirus pandemic. As part of these negotiations, trustees may then seek guarantees of future funding which Cuddeford suggested could be triggered on a contingent basis.
He said: "Trustees can get the assurances they need about future funding of the scheme while sponsors are able to concentrate their available resources on making sure the firm is still there in the future."
Trustees could also be looking for alternative guarantees if changes to corporate insolvency legislation changed the likelihood of schemes being credited in the event a sponsor went bust.
"Contingent funding arrangements have been around for a long time, but they are set to become far more mainstream," he added. "This is an approach whose time has come".
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