The Pensions Stability Buffer can be used to bridge the gap in views between a sponsor that does not wish to put more money into its defined benefit pension scheme and trustees who are required to be prudent. It is particularly useful if the sponsor is concerned about the risk of trapped surplus. This can be both very difficult and highly costly for sponsors to recover, so many sponsors are looking at establishing an alternative funding vehicle outside the scheme which can act as a funding buffer.
However, a buffer also provides security for the trustees and can be structured to provide legal protections for the scheme in the event of the sponsor’s insolvency.
Lynda Whitney, partner at Aon Hewitt, said
“Many sponsors feel that there is an asymmetry to pension scheme funding. The Pensions Stability Buffer looks to redress this imbalance so that funds are available for the pension scheme if they are ultimately needed, whereas it is much easier for funds to be returned to the sponsor if they are not required. This means sponsors are likely to be more willing to pay contributions to the Pensions Stability Buffer, increasing the overall security for members' benefits.
"The work already done by Eversheds and Aon Hewitt means that the Pensions Stability Buffer is cost effective and efficient compared to a traditional escrow account."
Steven Hull, partner at Eversheds, said:
“There is increasing concern about overfunding among sponsors of some defined benefit pension schemes and that surplus assets may become trapped within their schemes. The Pensions Stability Buffer is specifically designed to help reduce this risk. It provides security to the pension scheme trustees and can encourage sponsors to fund their schemes more fully and more quickly by giving them reassurance that they can recover excess contributions should a surplus arise in the future. It’s an ideal safety valve.
“The Pensions Stability Buffer draws on our and Aon’s combined experience of advising on the legal, actuarial and investment elements of alternative funding arrangements over many years. We have prepared template legal documentation which means that the buffer can be established quickly and cost effectively by trustees and scheme sponsors who also benefit from not having to re-invent the wheel. The arrangement is also flexible, allowing sponsors and trustees to choose which elements they need and tailor it to suit the particular circumstances of their scheme.”
Key features of the service include:
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Assets are held securely within a charged custody account
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Unlike an escrow account, the use of a custodian permits a wide range of investment opportunities
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Free initial meeting to assess whether the Pensions Stability Buffer is appropriate
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Template legal documentation
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Advice from Aon Hewitt on both possible triggers and how to invest the assets (including access to Aon Hewitt's delegated consulting service)
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Pre-agreed legal agreement with the custodian
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Competitive fixed fees for all key elements
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