The defined benefit pension landscape is once again under scrutiny, as volatile market conditions compel sponsors and trustees to reassess their funding strategies. For solicitors advising corporate clients, the challenge is clear: how to meet funding obligations without exposing the business to the long-term risk of overfunding and the consequential issue of trapped surplus.
While pension deficit escrows were last in vogue during the post-2008 and 2015 economic turbulence, they are enjoying renewed interest. As equity markets fluctuate and gilt yields remain volatile, some schemes may show temporary deficits that prompt pressure on sponsors to 'top up' funding. However, if markets subsequently recover, these top-up contributions risk becoming unrecoverable surplus - effectively trapping capital that could have remained strategically deployable.
A pension deficit escrow is a financial arrangement that allows a sponsoring employer to set aside funds in a segregated account to be used towards a pension scheme’s deficit. Crucially, these funds remain under the employer’s control until a predefined trigger - such as agreement by the scheme trustees or the outcome of a valuation - allows release to the scheme.
This mechanism permits rapid deployment of funds if needed while ensuring that, should the deficit narrow or disappear, the sponsor can reclaim the escrowed capital without the complexities and costs of surplus recovery.
Advisors advising on corporate transactions, refinancing, or pension negotiations are uniquely placed to recommend escrow as an elegant solution to the thorny issue of contingent pension funding. Escrow offers multiple strategic benefits:
The use of escrow arrangements has received positive consideration from regulators, including The Pensions Regulator (TPR), particularly when applied as part of a contingent funding arrangement. Moreover, leading actuarial consultancies have long endorsed escrow for its ability to balance prudence with flexibility.
From a legal perspective, escrow also provides clarity and insulation. Provided that the terms are clearly drafted and the structure complies with the statutory funding objective, there is little to obstruct its adoption. Solicitors must, however, ensure that the escrow agreement is bespoke to the client’s needs, particularly regarding trigger events, duration, and any conditions for release or reversion.
Today’s market presents a confluence of factors that make escrow particularly appealing. Many schemes are approaching full funding, creating anxiety about locked-in capital. Meanwhile, macroeconomic instability underscores the need for flexibility and liquidity. For sponsors who wish to demonstrate commitment without forfeiting optionality, escrow is not merely an option - it is a strategic asset.
With trustees increasingly open to creative funding approaches and regulatory frameworks allowing for contingent support mechanisms, solicitors have a critical role in bringing these solutions to the fore.
The pension deficit escrow service offered by trusted institutions such as DOS & Co. represents a tailored, professionally managed solution that aligns with best-practice governance and legal rigour. By providing an independent, regulated escrow structure, such services ensure transparency, compliance, and ease of execution.
What is of particular interest to trustees and employers alike is the fact that all funds are kept ring-fenced and safeguarded at the Bank of England - protecting them in the longer term against any risk of insolvency of the escrow provider or the underlying banking institution - funds that we hold in escrow are not loaned out on anyone's balance sheet. For the operators of larger schemes, with deficits in the tens or even hundreds of millions, the importance of this for a longer-term escrow arrangement cannot be overstated.
Clients benefit not only from the ability to satisfy trustee concerns promptly but also from the reputational value of demonstrating responsible stewardship. For solicitors seeking to offer clients a credible, low-friction mechanism to navigate pension funding challenges, escrow stands out as both technically sound and commercially compelling.
As the defined benefit pensions sector contends with renewed economic unpredictability, the need for innovative, flexible funding solutions has never been greater. Pension deficit escrows offer solicitors a practical tool to help clients avoid the pitfalls of trapped surplus while retaining strategic control over their capital.
Their speed of implementation, cost-efficiency, and legal clarity position them as the go-to choice for forward-looking sponsors. In an era defined by volatility, certainty is a luxury—and escrow can deliver it.
dospay is a trading name of DOS & Co. Ltd, a company registered in England and Wales with company number 08294966.
DOS & Co. Ltd. is registered with the Financial Conduct Authority under the Payment Services Regulations 2017 (FRN: 833374) for the provision of payment services.
All of our GBP escrow and third-party managed accounts are segregated and safeguarded at the Bank of England.
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