What is a pension deficit?

Companies offering defined benefit pension schemes (also known as final salary pensions) are particularly exposed to the risk of falling short financially and the pension fund being insufficient to provide benefits to all its members. Otherwise known as being in a deficit.

Whilst not a situation any company wants to find itself in, a deficit does not mean that the pension scheme is destined to fail. The Pensions Regulator created an Integrated Risk Management framework that provides practical help on what trustees should put in place to manage the risks associated with scheme funding. The key areas considered include the firm’s pension scheme funding strategy, investment strategy, and financial covenant support scheme. It is the latter that a surety solution can help with.

How can surety help?

A pension deficit guarantee is a form of surety bond that provides security to the pension fund in the event of the sponsoring employer/company becoming insolvent or not complying with an agreed deficit recovery plan. 

An alternative to the more traditional solutions that pension trustees turn to for protection, such as parental guarantees, real estate and bank letters of credit, pension deficit guarantees can be structured to help release assets and/or improve working capital. 

Due to the nature and size of these bonds, it is not uncommon for a number of sureties to provide the capacity (co-surety), thus providing the pension scheme beneficiary with a spread of risk across the market. 

Advantages of using pension deficit guarantees

A surety backed pension bond has some significant advantages in comparison to traditional methods of protection. These include:

• freeing up lines of credit with the bank so that these can be used for other business needs
• preventing the risk of a company over-funding its pension scheme
• in the event of a co-surety arrangement, the risk is spread across multiple sureties, offering a high level of security
• capacity provided is from strong rated carriers approved by the Pension Protection Fund (PPF).

Navigating the surety market can be a minefield. Miller has a wealth of experience with co-surety agreements and arranging pension deficit guarantees. Our team is here to help.