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Productive partnership Stephen Isgar, Kas Bank, considers the role of the custodian as regards contingent assets and scheme funding


n the canon of great sporting rivalries, none inspires more passion, romance or nostalgia than the biennial battle for the Ashes. This contest, steeped in history and post-colonial grudges, embodies the spirit of all sport like no other. And, despite the myriad disappointments that have followed, England’s hour of glory this summer remains an epic achievement. Remember when Alastair Cook and Jonathan Trott were the most productive batting partnership on Australian soil? Even if you are not a cricket fan, you cannot fail to appreciate the duo walking into bat against

In a nutshell 

the partnership between trustee and employer is crucial – each needs the other for the greater good of the company one approach to tackling deficits is for employers to set aside assets for the scheme to meet its funding commitments which offer trustees security against employer default a custodian is vital since pledged securities must be safeguarded through a separate account structure.

safeguarded through a separate account structure – ringfenced from the scheme’s assets and the sponsor’s balance sheet, for the scheme to have a claim on those assets in the event of employer default. There are many benefits to this approach. The most significant for the employer is a sizeable reduction in PPF levy contributions, allowing money that would have gone to the PPF to remain on the employer’s balance sheet and under their control, resulting in greater financial stability. For trustees, this translates into greater certainty for the scheme’s future:

The custodian’s role is vital, since pledged securities must be safeguarded through a separate account structure ringfenced from the pension scheme’s assets. Stephen Isgar

a ruthless Australian side on the verge of victory, only to rake in 329 runs and steal a draw. As partnerships go, that one evidently worked under the enormous pressure of expectation. I am not one for tenuous analogies, but this cricketing news did make me think of the partnership between pension scheme and employer and the balancing act both must maintain to keep the team in the game: the trustee managing assets and liabilities and the employer maintaining a financially robust company. Each needs the other for the greater good of the company.

Vital link It is the trustee’s primary duty to protect member benefits and their ability to do so depends on a financially robust sponsor, especially in volatile economic times. So the employer covenant is a vital link between the company and its pension scheme and requires diligent monitoring (recent Mercer research shows 37% respondents carried out formal monitoring once per year or less – out of 119 schemes surveyed) . Indeed, the Regulator has

Perfectly placed to assist

continued support from the employer and a stronger employer covenant as a result. Trustees will also benefit from bespoke account structures, supported by their custodian, and access to independent and neutral analysis. Such analysis offers an impartial valuation of the assets pledged based on mark to market accounting, with an option on margin calculation to remove price risk. Custodians are perfectly placed to assist in these structures – it has been reported this year that some are strengthening their links with trustees by making more intelligent use of the data they hold through regular valuations, collateral calculation and transition management, as well as regulatory compliance reporting. And our cricketing metaphor? How about this: the employer and trustees, two batting partners walking to the crease, with their consultants to coach them and the custodians acting as umpires, keeping a watchful eye and updating the scoreboard.

The Pension Protection Fund (PPF) has issued guidance and the custodian’s role is also vital, since pledged securities must be

Stephen Isgar is business development manager, institutional investors, Kas Bank;

indicated that trustees should scrutinise this as rigorously as they would fund performance and many trustees have been revisiting this as the issue moves up the risk register. Perhaps a general lack of understanding between trustees and employers makes it unlikely that the employer will approach the trustees with an open chequebook. Nor should trustees be willing to ride out these uncertain times in the hope that the finance director will inject a bundle of cash into the scheme. With this in mind, trustees have been investigating alternative ways to tackle deficits, while sponsors are keen to avoid overfunding the scheme. One such approach is for employers to set aside assets for the scheme to meet its funding commitments, without transferring them directly. This offers trustees security against employer default, safeguarding future contributions should the employer find itself in difficulty.

Pensions World March 2011


A productive partnership