PSB - OPDU PENSION SUPPORT BOND

A capital redemption bond providing security for pension funds while preserving assets for sponsoring employers

From Surpluses to Deficits

A few years ago most defined benefit pension funds were insurplus. Indeed, many companies were involved in litigation about their ability to recover surplus assets from their pension funds.

Today a combination of factors has left most companies nursing substantial deficits.

Deficit Funding

Regulatory pressure and Pension Protection Fund levies have caused companies to work with the trustees of their pension funds to agree how to eliminate their deficits within ten years.

There is no quick or easy solution to the funding problem. Companies will be expected to pay substantial sums into their pension funds. There is a chance that excess funds will be injected into some pension schemes if the actuarial projections on which the funding agreements have been based prove to have been too pessimistic.

Many companies are considering the use of contingent assets in order to reduce the risk of over-funding their pension schemes. A simple escrow account is one such contingent asset. It has some drawbacks. For example, amounts paid into escrow are not tax deductible and the funds in escrow do not count as an asset of the pension fund but it does give the funding employer the flexibility to recover over-funding.

Working closely with OPDU, the provider of insurance and advisory services to occupational pension funds holding over £115bn in trust, Leeward Insurance Company Limited has developed an innovative and flexible insurance product, the Pension Support Bond (PSB), which enables the funding employer to minimise exposure to over-funding its pension scheme while simultaneously enhancing the quality of its commitment to its pension scheme.

How does the PSB work?

The PSB is a capital redemption contract. It can be used to replicate the functionality of an escrow account without the drawbacks.

The sponsoring employer agrees a recovery plan with the trustees in order to eliminate the pension fund deficit. As partof this recovery plan the trustees agree to purchase a PSB. The premiums are then funded by the sponsoring employer on behalf of the pension fund.

The PSB can be surrendered by the trustees:

• immediately if the sponsoring employer becomes insolvent
• with the sponsoring employer’s consent, after any actuarial valuation of the pension fund’s assets andliabilities, or
• at the end of the recovery plan.

The surrender value will be the lower of an amount equivalent to the pension fund deficit and the amount accrued under the PSB. Any balance left after all payments due to the pension fund have been made will be paid to the sponsoring employer. Thus if in the event at the end of the recovery plan there is a surplus, excluding the amount accrued under the PSB, its surrender value would be nil. Should a deficit remain, the surrender value would be the lower of an amount equal to the pension fund deficit and the amount accrued.

How would the Assets be managed?

The premium is used to create an investment fund linked to the bond. The investment policy and strategy would be set by the trustees after having obtained actuarial advice and the agreement of the employer. The investment policy and strategy would be tailored to the needs of the pension scheme, utilising existing or new fund managers and appropriate investment instruments as may be desired.

Would the Policy be an Asset of the PensionFund?

As the trustees are the beneficiaries of the PSB, it counts as an asset of the pension fund.

Is the PSB a Suitable Product for all Customers?

The PSB is only a suitable product for customers who are deemed to be intermediate customers by the Financial Services Authority under its Conduct of Business (COB) rules.

Who issues the PSB?

Leeward Insurance Company Limited, a Bermuda-based insurer regulated by the Bermuda Monetary Authority.

Who administers the PSB?

The bond will be administered by Leeward Management Co Ltd, which is a member of the Thomas Miller group of companies.

Thomas Miller has been providing insurance services since 1884.

The Thomas Miller group of companies has the underwriting, claims handling, loss prevention, financial, legal, risk management and investment skills needed to provide world-leading insurance services. The Thomas Miller group of companies includes The Occupational Pensions Defence Union Limited (OPDU) and Trustee Risk Management Limited (trm). OPDU provides insurance services to over 350 occupational pension funds. trm provides educational and training services to trustees to assist them in achieving excellence in the governance of occupational pension funds.

What are the costs of the PSB?

Management fees and expenses are charged in accordance with an agreed schedule.