Coronavirus & escrow (two words I never expected to use in the same sentence)

Topic:

Funding & investment

Date published:

Tuesday, 31 March 2020

Author:

James Double

This Covid-19 world certainly is crazy. Implications are far reaching and pensions are not immune – a very real example being the ‘coronavirus crash’ halting a full scheme buyout for one of our clients.

Everything was looking positive…

An actuarial valuation in August 2019 estimated the pension scheme had a buyout deficit of £1.1m (88% funded). Favourable market movements meant we’d be close to buyout position when the pension trustees met to discuss the results in early February. The trustees agreed to sign off the valuation on the basis no further contributions would be required as the scheme sponsor would fund a small buyout deficit if needed.

All was looking good ahead of the February meeting. The trustees and sponsor were considering locking into this position by moving assets to buyout aware funds. These would provide a good match for the pension scheme liabilities whilst further work was done to compare market quotes to the estimated buy out position.

…and then markets tumbled

We were looking at how the implementation of this new strategy would look when coronavirus led to markets crashing. Liabilities went up, assets didn’t and the estimated buyout deficit went back up to c£700,000.

With the world in a truly unusual state, the pension trustees and sponsor felt a buyout quote could easily be up to £0.5m away (either way) from the estimated position. They were also reluctant for large amounts of contributions to be paid into the scheme when markets could revert post-coronavirus.

The solution

We suggested an escrow account could be a good solution. The sponsor would pay ‘normal’ contributions (based on the worsened current funding position) into the escrow account. When markets have settled down, if the scheme needs the funds (i.e. we can’t achieve buyout without it), the scheme will draw down the assets. If the scheme doesn’t need it, the additional funds will be returned to the sponsor. The scheme’s investment strategy will continue to be de-risked to reduce funding volatility.

The scheme’s legal adviser helped set up the escrow account and, with PSGS acting as the escrow agent, we were surprised at just how cost effective a solution it is. It turns out a product I’d always thought would be expensive to implement can be done at a price the client wouldn’t even blink at!

I guess that’s a silver lining (of sorts) to this coronavirus cloud.

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