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The opdu Report - Issue 23, November 2007 Bulletin Board Pension deficits still make headlines. There is no complete solution to enable employers to eradicate deficits and avoid future exposure to pension risk. Even schemes that today appear to be fully funded may produce deficits in the future. Employers have to make difficult decisions as to the appropriate level of funding to maintain schemes and clear deficits. Many employers, while wholly committed to funding their pension schemes, are now becoming worried about the risk of over funding as a result of responding to pressure to fund using relatively short-term valuation criteria. If an employer is worried about over funding its pension scheme while the pension trustees are simultaneously maintaining pressure for early eradication or added security in a recovery plan, a Pension Support Bond may be of interest to both parties. The Pension Support Bond is a new product developed in consultation with opdu specifically to give added security while removing the risk of over-funding. The Pension Support Bond works in a similar manner to an escrow account but without some of drawbacks normally associated with contingent assets. It is structured as a long-term insurance policy. Pension contributions by the employer to fund the premiums for the Bond are tax deductible. The value of the policy will be a pension scheme asset through the period of a recovery plan. When the policy is surrendered at the end of the recovery plan, the surplus after clearing any residual deficit will revert to the employer - thus avoiding over funding. The primary duty of trustees is to require the amount of money needed to achieve the funding target. Legal opinion has been given that trustees have no duty to seek any extra and therefore there is no reason why trustees should not accept a proposal that will ensure that any amount in excess of their funding target should be released to the employer.
Read more on the Pension Support Bond pages of this site. For further information please contact Jonathan Bull
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