18 February 2022
We recently launched the LCP Streamlined Escrow to provide our clients with a time and cost efficient way to set up an escrow for their pension schemes.
We are seeing lots of interest from clients for this new service. World Duty Free Group was one of our first clients to adopt this service and you can read more about how they approached the escrow in the case study taken from our contingent funding handbook, which also provides insights into why contingent funding is such a rapidly growing area, with a useful reference section setting out the basics of the most common mechanisms (this includes asset backed funding, letters of credit, and a range of other solutions).
Many of our clients are finding escrows an increasingly attractive option, especially given the improvement in funding levels that several schemes have recently experienced, and in light of the regulatory direction of travel towards more prudent long term funding targets.
For well-funded schemes, an escrow can be used to help prevent “over-funding”. This could mean avoiding a trapped surplus on wind-up, with the corresponding tax charge on a refund of surplus. Escrows are increasingly being used to manage these risks for full scheme buy-ins, where there is often an unknown deferred premium adjustment following a period of data cleanse.
But escrows can also prove valuable in other situations. In particular, they can be used to help bridge any gap between trustee and employer views on funding assumptions or investment strategy. For example, the additional security provided can enable the scheme to take more investment risk, with the escrow funds being available to compensate the scheme if these risks don’t bring the hoped for returns. At the same time, any upside returns could mean the sponsor can get its money back.
Our Streamlined Escrow provides the following advantages for sponsors and trustees over approaching the open escrow provider market directly:
- Quick and efficient set-up: the pre-designed contract helps you get a competitive deal without the lengthy and costly negotiations that would be required to secure similar terms in the open market.
- Certainty on fees: the one-off fixed set-up fee includes all initial set-up costs with the escrow agent BNY Mellon.
- Flexibility: there are no minimum or maximum contributions, or limits on the number of contributions or withdrawals you can make to the escrow. You can choose whether to invest the escrow assets in cash or one of nine well-known money market funds.
If you would like to find out more about our Streamlined Escrow for pensions or would like to investigate the use of contingent funding solutions for your pension scheme, please speak to your usual LCP adviser or contact one of our specialist contingent funding experts shown on this flyer.