The Guarantee is the legal instrument by which the Trustees can ensure that the benefits of Scheme members (other than those arising from Bonus Augmentations) will always be paid, even if there are insufficient funds to pay those benefits. The Guarantee ensures that these benefits will maintain their real value by being increased in line with inflation and also offers some protection for the continuation of Bonus Augmentations.

It takes the form of a Deed entered into by the Trustees and the Secretary of State for Trade and Industry. Although the wording refers to the Clauses of the Scheme and the Coal Industry Act, the Guarantee is a separate document, which places obligations on both the Secretary of State and the Trustees. The existence of the Guarantee as a separate document is an important safeguard. Because it is neither in legislation nor in the Rules of the Scheme it cannot be altered by Government without the agreement of the Trustees. As a contractual commitment it is enforceable through the courts if necessary. This provides an extra layer of protection for the members of the Scheme. The way in which the Guarantee works is written into the Rules of the Scheme.

How does the Guarantee work?

If, at a future valuation, the Scheme’s Actuary finds that the assets of the Guaranteed Fund (ie that part of the Scheme’s assets from which all benefits except Bonus Augmentations are paid) are not sufficient to meet the liabilities for Guaranteed Benefits, action will be taken to increase the assets of that Fund so that the benefit payments can be met.

The way in which a deficit is corrected is:

	Firstly by transfer of any assets required from the Investment Reserve;
	Secondly by equal transfers of assets from the Guarantor’s Fund and the Bonus Augmentation Fund;
	Thirdly by payments from the Government under the terms of the Guarantee. Any liability on the Government would be paid to the Scheme in 10 equal instalments matching the way in which Government received its share of any valuation surplus.

What does the Guarantee Cover?

The Guarantee ensures that the benefits earned by Scheme members during their employment with British Coal, and any benefit improvements from surpluses which were awarded prior to 31 October 1994, will always be paid and will be increased each year in line with the Index of Retail Prices (RPI).

Bonus Augmentations from surpluses after October 1994 are not fully guaranteed but they are subject to the secondary, standstill guarantee which makes sure that pensions will not reduce even if there are not enough assets in the Bonus Augmentation Fund to cover its liabilities. The worst that will happen is that pensions would stand still for a while as RPI increases on guaranteed benefits were offset by a corresponding reduction in bonuses. Bonuses would, therefore, be eroded over time either until they reduced to zero or until the Scheme’s financial position, as assessed by a future actuarial valuation, improved. If bonuses did get down to zero, then the remaining benefit, all of a member's pension from the Guaranteed Fund, would once again increase in line with RPI.

The detailed provisions of the Rules enable the Trustees to shield members from the full effect of standstill if the valuation deficit in the Bonus Augmentation Fund is not large.