Companies employ escrow accounts to fund pensions
The use of escrow accounts in relation to the funding of pension schemes is becoming more common.
The drinks company Diageo has recently transferred £150 million to its UK pension scheme from an escrow account that was set up following its last actuarial valuation. This payment will help to reduce the deficit, which amounted to £1,383 million as at 30 June 2009.
The transfer of the funds was announced by Diageo in the company's preliminary results for the year ending 30 June 2009. The deficit before taxation in respect of its pension plans increased by £975 million during the year, from £408 million as at 30 June 2008. The company says that it will now hold discussions with the pension funds' trustees as to future funding plans, but annual cash contributions are not expected to increase significantly.
Abbey secures deal with trustees
Abbey, the financial services company that was taken over by Santander in 2005, has secured a deal with the trustees of its final-salary scheme, which will give more control to the company over the scheme's investment decisions. It also involves an escrow account.
Following discussions between the company and the pension trustees, it was agreed to set up a trust-based investment committee made up of four senior managers from Abbey and two pension trustees. The committee enables Abbey to bring the scheme's investment strategy more in line with its own way of thinking.
Mark Adams, Abbey's HR director, said: "We were very clear that effectively we wanted to be able to run the investments more on a par with how the bank looks at risk. We wanted to have an investment strategy that is more risk-focused and more proactive than the traditional type of investment strategy"
As part of the deal struck between the company and the trustees, Abbey placed about £1 billion in an escrow account to fund the scheme's deficit. These funds, which have been placed in liquid assets in accordance with the wishes of the trustees, will be drawn down annually until January 2016 to meet the funding requirements of the scheme.