A London-listed company has become the first to use surety bonds in its funding strategy for its defined benefit pension plan.

The surety bonds are viewed by the promoters of this transaction as good alternatives to letters of credit (L/Cs) and bank guarantees routinely used in such pension plans.

Largest syndication

The £400 million, five and a half year deal was provided for an undisclosed pension fund by the risk management unit of Aon plc, Aon Risk Solutions in collaboration with Aon Hewitt.

Team leader of Aon Risk Solutions Surety & Guarantee, Mark Holt, said the transaction brought together eight major insurance companies in the largest yet syndication in the UK surety market.

"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," he added.

Non-cash funding

"Around half of our UK pension scheme clients already have some form of non-cash funding, contingent asset or guarantee, such as an L/C," according to Lynda Whitney, a partner at Aon Hewitt. She maintains that surety bonds offer an option that does not put a strain on working capital.

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.

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