| CTA 101 |
|
|
| 29/04/2007 | |
|
Michael Schuetze, Director of Allianz Global Investors Pensions Business, answers this week's question on CTAs. 1. What are Contractual Trust Arrangements (CTAs) and how did they come about? The term denotes a structure for funding pension obligations, allowing the investor to reduce the balance sheet drawn up in accordance with GAAP/IAS by the amount of the pension provisions being funded. The most commonly encountered form is what is called a two-sided trust model. Within the framework of a trust agreement (referred to as an asset trust ("Vermögenstreuhand" in German) or an administration trust ("Verwaltungstreuhand"), the assets earmarked for funding are managed by a unit set up for this purpose (in the form of a registered association or a limited liability company) on a fiduciary basis. Within the framework of the other trust agreement (what is called an employee trust ("Mitarbeitertreuhand") or security trust ("Sicherheitstreuhand"), the employees are granted the legal claims in relation to the asset trustees, thus securing the trust's assets for the employees against insolvency. 2. How widely are they used and what are the advantages for pension funds? Many large German companies that draw up their balance sheets in accordance with GAAP/IAS have already set up their own CTAs for funding pension obligations entailed by the firm's pension scheme. The current trend is that the market for financing pension obligations, and thus for CTA solutions, is reaching wide sections of Germany's mid-tier companies. For this reason, more and more standard solutions with supra-company group CTAs are being offered besides the company-dependent individualised CTA solutions (company CTAs). The advantages of a CTA solution can be summarised as follows: - balance sheet contraction effect in accordance with US GAAP or IFRS - freedom in terms of capital investment - funding of past and future service - no consent from employees necessary - no influence on formulation in terms of labour legislation - flexible donations (size and time) (max. netting out with donation equal to the amount of the DBO/PBO[defined/projected benefit obligations]) , but without donation obligations - donation with non-liquid assets (e.g. real estate) possible at least in part 3. What are the challenges and constraints involved in implementing them? The following tasks and questions confront the investor when implementing a CTA: -legal design and implementation with a company's own CTA (setting up an incorporated association or a limited liability company, set of agreements, expertise from an auditor); the outlay is reduced by opting for a supra-company CTA solution -sophisticated capital investment concept and asset management (ALM analysis, capital investment conception, selection of suitable asset managers); in the case of supra-company CTAs, this is usually offered as part of the overall package -risk management (can also be offered by the asset manager) |
|
Articles of the same Serie : 101 |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it