Surety bonds: An Alternative Form of Pension Funding
Due to the assets and liabilities of pension schemes being recalculated every three years through an actuarial valuation, the level of capital that any given company must commit to the scheme will vary frequently.
This, coupled with the fact that any capital committed to the scheme is irretrievable, makes it especially important for communication, media, and technology companies not to over-capitalise the pension pot at any given time, and for an appropriate repayment structure to be in place so as to ease cash-flow positions where possible. Even though future payments may be reduced due to an earlier overpayment, this could still put pressure on cash flow.
A potential solution would be the pledging of surety bonds to the pension scheme trustees. The product is a contingent liability and so sits off the balance sheet. Surety bonds can then be used in a number of ways for deferring and restructuring payment plans, which could free up capital to be used elsewhere in the business, subject to the strength of the corporation.