Pension Deficit Escrow

Pension Deficit Escrow is an arrangement used by employers to set aside money to support an occupational pension scheme with a funding shortfall.

Instead of paying funds directly into the pension scheme, the employer pays money into an independent escrow account. The funds are held there and released only when agreed conditions are met.

This allows employers to provide additional security to the pension scheme while retaining flexibility over when funds are ultimately paid into the scheme.

Pension Deficit Escrow is suitable for employers that sponsor defined benefit pension schemes with an agreed funding deficit.

It is commonly used by companies that have agreed a deficit repair plan with trustees and want to provide extra comfort without accelerating cash contributions unnecessarily.

Trustees and their advisors often support the use of escrow where it strengthens the covenant and provides clear, ring-fenced protection for the scheme.

Pension Deficit Escrow is typically put in place as part of an agreed funding strategy between the employer and the pension scheme trustees.

It may be used where the employer expects to improve funding over time, where contributions are linked to future performance, or where trustees require additional security alongside a recovery plan.

Escrow is also used where employers want to demonstrate commitment to deficit reduction while managing cashflow and balance sheet impact.

Escrow involves holding real money, independently and in advance, so that payment does not depend on a future claim being accepted.

Bonds and insurance rely on a third party promising to pay later, subject to conditions, exclusions and their own financial capacity at the time of claim.

Employers with defined benefit pension schemes often need to balance funding obligations with wider business needs. Paying additional cash directly into the scheme can reduce flexibility and may be difficult to reverse if circumstances change.

Trustees, on the other hand, want confidence that deficit repair plans will be met and that additional support is available if funding does not improve as expected.

Pension Deficit Escrow addresses this tension by setting aside money in advance, without immediately transferring it into the scheme. This provides security for the trustees while allowing the employer to manage cash more carefully.

The primary benefit of Pension Deficit Escrow is balance. It strengthens the security position of the pension scheme without forcing early or irreversible contributions.

Funds held in escrow are ring-fenced and cannot be used for other purposes. This gives trustees comfort that the money is genuinely set aside. At the same time, the employer retains flexibility over when and how funds are released into the scheme, subject to agreed conditions.

Escrow can also encourage constructive engagement between employers and trustees by aligning incentives around funding improvement.

Benefits for Employers

For employers, Pension Deficit Escrow provides a way to demonstrate commitment to deficit reduction while protecting cashflow.

It allows additional support to be provided alongside an agreed recovery plan, without accelerating contributions unnecessarily. In some cases, escrow arrangements can be structured so that funds are returned to the employer if funding improves faster than expected.

This can help manage balance sheet impact and support longer-term business planning.

Benefits for Trustees and Scheme Members

For trustees, Pension Deficit Escrow provides visible and tangible security. Funds are set aside independently and are not reliant solely on the future financial strength of the employer.

The agreed release conditions give trustees confidence that money will flow into the scheme if funding targets are not met or if agreed trigger events occur.

Scheme members benefit indirectly from improved funding discipline and clearer security arrangements supporting the long-term health of the pension scheme.

Pension Deficit Escrow can be structured in different ways, depending on the funding plan agreed between the employer and the trustees. There is no single standard model.

In some cases, a single lump sum is paid into escrow at the outset. In others, contributions are made over time, for example annually or when certain financial targets are met.

Escrow arrangements may be used to support a full deficit repair plan, or to provide additional security alongside regular scheme contributions.

Yes. Pension Deficit Escrow arrangements are often tailored to reflect the employer’s business profile and the trustees’ funding concerns.

Contribution schedules can be linked to profits, cashflow, refinancing events or other agreed metrics. Release conditions can also be tailored, for example to reflect improvements in funding levels or changes in covenant strength.

Escrow can be combined with other forms of security, such as guarantees or charges, where trustees require layered protection. Advisors often recommend this where funding risks are complex or long-term.

All escrow arrangements are administered through the dospay digital escrow portal.

The portal provides a single place where authorised parties can view account balances, payment history and escrow status. It also supports the submission and tracking of information required for payments or releases, in line with the escrow agreement.

Using a digital portal reduces reliance on email chains and manual reconciliation. It improves transparency and creates a clear audit trail for payments and releases. Advisors often find this helpful when reviewing payment history or responding to queries during the life of the project.

In practice, Pension Deficit Escrow works as a standing pot of money that sits outside the pension scheme but is set aside for the scheme’s benefit.

The employer and trustees agree the contribution plan and the conditions for release. The employer then pays money into the escrow account, either as a lump sum or in stages over time. The funds remain held independently and cannot be used for any other purpose.

During the life of the arrangement, the parties monitor funding outcomes against the agreed plan. If the agreed release conditions are met, funds are released from escrow into the pension scheme. If the agreed return conditions are met, funds may be returned to the employer, depending on what the parties have agreed in advance.

This provides trustees with genuine security, while giving the employer a more flexible way to support the scheme alongside its normal funding obligations.

The statutory funding regime and the trustees’ role remain unchanged. Regular scheme contributions continue as agreed under the recovery plan.

The escrow arrangement sits alongside those obligations. It provides additional security that can be called on if funding outcomes are not met or if agreed trigger events occur.

The escrow agent does not assess the funding position or negotiate with trustees. It simply holds and releases funds in line with the escrow agreement.

Only parties authorised under the escrow agreement can give instructions to the escrow agent. This is agreed at the outset and documented clearly.

Instructions are usually tied to specific events, such as the issue of a certificate, confirmation of a milestone or the occurrence of a payment default. The escrow agent checks that the instruction matches the agreed conditions before acting.

This approach ensures that payments are controlled, predictable and not dependent on informal requests or unilateral decisions by one party.

Only parties authorised under the escrow agreement can give instructions to the escrow agent. This is agreed and documented at the outset.

Instructions are usually linked to specific events, such as confirmation of funding levels, trustee notices or other agreed triggers. The escrow agent checks that the instruction matches the agreed conditions before acting.

Informal or unilateral requests are not accepted.

Below is a practical view of the steps that parties typically follow when using Pension Deficit Escrow.

1. Agree the escrow structure and funding plan
   The employer and trustees agree how much will be set aside, how contributions will be made and what conditions will trigger release or return of funds. This is documented in the escrow agreement.
2. Open the escrow account and begin funding
   The escrow account is opened with us. The employer makes contributions into the account, either as a lump sum or over time, as agreed.
3. Monitor funding outcomes over time
   Funds sit in escrow, ring-fenced and protected. Balances and activity are visible through our digital escrow portal.
4. Apply release or return conditions
   At agreed points, funding outcomes are assessed against the agreed conditions. If release conditions are met, funds are paid into the pension scheme. If return conditions are met, funds may be returned to the employer.
5. Handle uncertainty or disputes if they arise
   If there is disagreement or uncertainty about whether conditions have been met, the funds remain held while the agreed process is followed.
6. Close the escrow arrangement
   Once the deficit has been addressed or the arrangement has otherwise run its course, the escrow account is closed in line with the agreement.

Setting up a Pension Deficit Escrow account starts with agreement between the employer and the pension scheme trustees on how the deficit support will work. This includes the amount to be set aside, how contributions will be made and what conditions will apply to releases or returns.

Once this is agreed in principle, an escrow agreement is prepared. This document sets out how the account operates, how funds are contributed, and the circumstances in which money may be paid into the scheme or returned to the employer.

At the same time, we begin the account opening and onboarding process. These steps run in parallel so the account can be opened efficiently once the agreement is finalised.

The time needed to open a Pension Deficit Escrow account depends on the complexity of the employer’s structure and the number of parties involved.

For straightforward arrangements, account opening can usually be completed within a short period once the required information has been provided and the escrow agreement is agreed. More complex group structures or joint sponsor arrangements may take longer.

Most delays arise from incomplete information rather than from the escrow process itself.

To open a Pension Deficit Escrow account, standard onboarding checks are required. These are similar to the checks required when opening a bank account or instructing a law firm.

This usually includes confirming the identity of authorised individuals, the ownership and control of the employer entity, and details of the party or parties funding the escrow.

We may also need basic information about the pension scheme and the agreed funding arrangement, to ensure the escrow account is set up correctly.

The following information is typically required to open a Pension Deficit Escrow account:

• Details of the employer or sponsoring entity
• Identification information for authorised individuals
• Corporate documents showing ownership and control
• Details of the pension scheme and trustees
• Agreed contribution plan and funding schedule
• Summary of the release and return conditions
• Bank account details for funding contributions

Providing this information clearly and early helps ensure the account can be opened without unnecessary delay.

Funding may be made as a single lump sum or through contributions over time. The timing and amount of contributions are agreed with the trustees and set out clearly in the escrow agreement.

Once paid into escrow, the funds are ring-fenced. They cannot be used for any purpose other than the agreed pension deficit support.

Payments from a Pension Deficit Escrow account are made only when the agreed release conditions are met.

These conditions are set out in the escrow agreement and are usually linked to funding outcomes, trustee confirmations or other agreed trigger events.

When a release request is made, we check that the agreed conditions have been satisfied before releasing funds in line with the escrow agreement.

If instructions are disputed or unclear, we will not release the funds.

Instead, the funds remain held safely in the escrow account while the parties follow the process set out in the escrow agreement. This may involve clarification, confirmation from an agreed third party, or the use of the dispute resolution process under the underlying contract.

This approach protects both parties. It ensures that money is not released prematurely and that funds remain available once the position is resolved.

If a party to the underyling contract becomes insolvent, we continue to operate under the escrow agreement.

Because the funds are held in escrow and not in the control of either party, they are protected from being used for other purposes. We will follow the agreed instructions and any applicable insolvency process, as set out in the escrow agreement.

In practice, this can provide greater certainty than relying on funds held directly by one of the parties, particularly where payment timing or entitlement is being considered as part of an insolvency situation.

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What happens if DOS & Co. becomes insolvent?

All escrow funds are segregated (kept separate from our own funds), safeguarded (protected by law from our own creditors) and kept liquid and unencumbered at the Bank of England. In the event of our insolvency, we have set aside regulatory capital that will be used by our administrators to 'unwind' our affairs - this will usually involve working with the parties to agree the identity of a new escrow agent who will 'step in' to carry out our obligations under the escrow agreement.