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Funding and overfunding: designing the end-game

Innovative approaches to scheme design, funding or strategy can increase your end-game options.

In volatile markets, deficits can quickly change to surpluses. From a corporate perspective, overfunding a defined benefit scheme is a risk because surplus can become trapped due to legal and regulatory restrictions, and is inefficient from a tax perspective. From a trustee viewpoint, that can mean that sponsors are less willing to engage where funding is close to (but has not reached) buy-out levels.

How can we help?

A range of alternative financing options, ranging from basic to highly sophisticated, is available to help pension scheme sponsors provide additional security or improve their scheme’s funding position without necessarily making direct cash contributions, including:

  • dynamic funding plans
  • escrow accounts
  • reservoir trusts
  • security
  • guarantees and negative pledges

Using group assets to provide a source of income to the pension scheme can bring benefits for both the sponsoring employer and trustees. Our Pension Risk group has completed several high-profile asset-backed funding (ABF) structures, acting both for sponsoring employers and trustees. The complexity and sophistication of ABF arrangements requires near-surgical precision to ensure that the balance of risk and reward, control and protection is tailored to withstand evolution in the funding risks that the structure is designed to mitigate: our experienced team brings all the right specialist knowledge to the table.

For an overview of some of the options, including a look at the practical implications of dealing with surplus in the end-game, take a look at our February 2023 webinar ‘The end-game: options, strategy and tactics for DB pension schemes’, together with our post-event Q&A article addressing some of the common themes and questions that emerged. You can access the article here.

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Cash is not (always) king

Alternative financing options for pension funds

Pension Risk Group