Laura McLaren, Partner, Hymans Robertson, says: “Today’s guidance is particularly timely given the current backdrop. It’s a reminder to trustees of the value of early contingency planning and being ready to act before it’s too late and we are supportive of the Regulator putting more emphasis on managing these issues. Trustees might not think that they’ll ever face this situation, but the risk of sponsor insolvency is very real. As the fallout from the pandemic continues and Brexit looms on the horizon, there are almost daily announcements of companies cutting jobs. There’s a sense things may get worse before they get better. Sadly, it seems inevitable not all DB schemes’ sponsors will survive.
“The guidance includes some particularly helpful practical case studies. These examples underline an important warning to trustees to understand the position of creditors and be vigilant to other stakeholders seeking or enforcing security ahead of the scheme where companies may be in refinancing or restructuring talks to help the business stay afloat. This points to TPR seeing cases of schemes losing out in these circumstances. There is also some helpful clarity on the thought process trustees will need to go through and steps to take, but judgement will be required to assess in the particular circumstances how much ‘leaning in’ is appropriate to support a turnaround plan and how best to protect members’ benefits.
“What comes across loud and clear is that despite the difficulties of preparing for the unknown, trustees should take proactive steps today. Early discussions and getting the right monitoring information in place is a good starting point and will enable swifter action in the face of material changes. The push to have legally enforceable information sharing protocols in place will extend beyond the arrangements many schemes currently have in place.
“Similarly, testing different potential future scenarios and developing a shared understanding of when covenant and/or funding risk would exceed tolerable levels is key to implementing meaningful contingency plans and protections such as security or negative pledges. In our experience, once signs of distress are evident, the key priority for trustees is to secure a seat at the table to participate in discussions at the earliest opportunity or risk getting left behind. Once other stakeholders are competing for value alongside the scheme there is typically less opportunity to improve outcomes.
“Whilst many of the themes in the guidance are familiar from previous TPR statements, we are pleased to see them given prominence with trustees and sponsors facing a daunting economic horizon in 2021.”
Sarah Ballantyne, a professional trustee at Dalriada Trustees, said: “Ongoing monitoring of employer covenant has never been more important for protecting scheme outcomes. Many trustee boards have used the uncertainties caused by Covid-19 to request further and more regular financial information from their sponsor, whether easements on Deficit Repair Contributions were requested or not. This sharing of information should be continued and used to monitor and prepare for any reduction in covenant strength. Engaging in early and collaborative discussions with the employer on its financial outlook, trading and liquidity position is key. As is understanding the position being taken by a sponsors lenders, and credit insurers. Preparation, quality advice and trustee experience can all improve member outcomes. Agreeing a monitoring framework in normal times will also serve in times of stress. We are clearly not in “normal times” but the earlier issues are identified and addressed, the greater the prospect of improving the scheme outcome in times of corporate stress before they become distress.”
Karina Brookes, UK Pensions Covenant and Strategy Leader at EY-Parthenon: “The guidance issued today by The Pensions Regulator is not only a reflection of additional considerations for businesses with sponsor pension schemes but also a call to action for trustees to sharpen their elbows, ensure they have a seat at the table and assert their needs like any other significant creditor to a stressed business.
“With England in a second lockdown, various restrictions in place across the rest of the UK and government support measures for business due to wind down, questions are mounting around what the sponsors of pension schemes will look like from early 2021 and beyond. TPR is urging trustees to not sit back and wait until a sponsor is in distress but to act now, and with greater authority, to safeguard the pensions covenant.
“EY-Parthenon’s recent profit warning analysis showed nearly two thirds (61%) of listed DB scheme sponsors issued profit warnings in the first nine months of this year. Ninety per cent of these were COVID-19 related due to their concentration in more traditional industries that are particularly vulnerable to the current economic climate. In such a challenging environment it is more important than ever that trustees consider the employer covenant in all decision-making. Today’s guidance from the regulator is hugely helpful in reinforcing this.”
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