Call on assets on discontinuance

[Irn Bru 4 Hangovers]

A couple of past questions give answers along the lines that if a pension scheme becomes financially unmanageable to a sponsor then the Trustees should consider setting TPs to, say, buyout level in order to increase the scheme's call on the Company's assets in the event of the Company becoming insolvent.

However, wouldn't such a debt in any case be calculated on a s75 type basis based on a proxy to buy-out cost? If so, then how relevant are the scheme's TPs here?

I can see how the larger deficit might give the Trustees more leverage to accelerate funding (which may be some use depending on how poorly the sponsor is). I can also see how the gilts-based discount rate may be more in line with the likely investment strategy in this case. But I'm just not convinced by the creditor (bump up the call on assets) argument - I like the idea of it but I'm not sure how it would affect the scheme's standing as a creditor in practice.

Have I missed something here?

 

[YetAnotherStudent]

Could you give a pointer to which questions mention it?

I also thought the main reason for moving to a bond yield was to 'justify' the payment of higher conts now; as well as being closer to the buyout cost.

The Q I just found in the Apr 07 paper just lists the default list from the notes without further elaboration (viz, move to bond rate, but no expansion) (Q 3 part v)

I think you are correct in saying that the size of the TPs has no bearing on the position of the scheme in the company's priority order on insolvency.... it'll be the debt on employer that counts, and that won't be calced until insolvency anyway....

 

[Irn Bru 4 Hangovers]

Yes that Question was one of the ones I had in mind (I'll see if I can find more examples).

The examiners' report just says "change the investment strategy to bonds".

The ASET for that paper elaborates a bit more,

"Change the scheme's investment strategy to bonds...assuming liabilities are valued using a discount rate based on the yield underlying the asset holding, a higher value will be placed on the liabilities. This gives the trustees a stronger argument for a larger percentage of whatever sponsor assets are available."

On reflection, I suppose this doesn't mean the sponsor would become insolvent necessarily; just that there is stronger argument for additional funding while the sponsor is solvent if they choose a bonds-based funding target. I'll see if I can find any other Qs...