The background

Our client, with a relatively well funded scheme, was targeting a full buy-out by 2024.  Contributions were therefore set at a level expected to get to buy-out by that date.  However the employer did not want to make a legally binding commitment to pay contributions at this level for that entire period, because of the risk of overfunding and the impact on its accounts. 

Our solution

The technical provisions were set on an ongoing basis (ie lower than full buy-out) and the schedule of contributions only committed the employer to pay the contributions until the fourth anniversary of the valuation date.  As four years contributions at this level were more than sufficient to fund the technical provisions, the statutory requirements were met.

A non-legally binding side letter was agreed that set out both parties’ expectations that

• at the next valuation the period for which contributions were paid would be extended for another three years; and
• if that valuation showed that continuation of contributions at the existing level until 2024 was not expected to reach the buy-out target, then the level of contributions would be increased.

The trustees were content with the non-binding nature of this agreement, as they have the power to trigger a wind-up of the scheme.  If the employer does not abide by the terms of the agreement, the trustees have made it clear that they will seriously consider using this power.

The results

The trustees were confident that funding would be made available to reach the buy-out target in the desired timeframe, while the company was happy that it has managed the risk of overfunding the scheme.