A FTSE100 firm has become the first company to use a surety bond as part of its scheme funding strategy, says Aon Hewitt.
The £400m, five-and-a-half year deal means the unnamed scheme will receive a pay out in the event of its sponsor going bust.
The deal has been struck across eight major insurance companies in what Aon said was the largest syndication the UK surety market has ever seen.
A surety bond is an undertaking from an insurance company to pay a specified sum to a pension scheme on certain specified conditions such as company insolvency or non-compliance with the scheme’s deficit recovery plan.
Aon claimed the use of the bonds would grow among pension funds as they put less of a strain on working capital than other contingent assets.
Aon Risk Solutions surety and guarantee team leader Mark Holt said: “Surety bonds are rapidly replacing bank guarantees in many other areas and can play a crucial role in providing alternative off balance-sheet credit for a range of clients, transactions and industries.”
Aon Hewitt partner Lynda Whitney added: “Around half of our UK pension scheme clients already have some form of non-cash funding, contingent asset or guarantee, such as a letter of credit.
“But surety bonds offer a new opportunity – one which does not put a strain on working capital and which is with providers who offer excellent security.”
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