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Dealing with distress

It’s a fact that many businesses face significant challenges from the Covid-19 pandemic. Whilst other colleagues have considered the macro effects of the coronavirus crisis, I’m keeping things micro…

For a business, loss of revenue reduces the cash available to meet commitments, including pension contributions. At the same time, depressed asset values and the increased demand for ‘safe’ assets such as government bonds have increased the value of a defined benefit (DB) scheme’s liabilities and funding deficits will have increased significantly.

With many new issues to face, a DB scheme may feel like one challenge too many. Tensions with the pension trustee board may grow. A finance director who is also a trustee will be conflicted. The Pensions Regulator (TPR) might start to take an interest in your trustees and your scheme.

Whilst these issues aren’t new to us as professional trustees, they are for many UK firms. What’s new to us is the scale of those potentially affected.

What is the appropriate response?

A pension scheme is a long-term investment but, to pay full benefits to all members, the sponsor needs to be there to support it. In the current crisis, many businesses viable during normal trading conditions face a real risk of insolvency in the short term from running out of cash.

There are actions an employer can consider taking. How much they help will, of course, depend on the circumstance of each business and its pension scheme.

  • Suspending employer contributions. For pension trustees, agreeing to this for a limited period is not unreasonable and may be right if the alternative could be insolvency or an employer weakened for the long term. There are steps to go through but, with a bit of expert help, a balance could be found that protects the interests of both sponsor and pension scheme.

  • Actuarial valuation date and knowing when to account for experience after the valuation. The 15 months allowed to agree the valuation can be used to the sponsor’s advantage, provided member benefits are not put at risk. By carefully considering risks and options, it may be possible to agree a reasonable recovery plan based on covenant and affordability.

  • Investment strategy. The extent of any recent deficit increase will depend on a pension scheme’s investment and hedging strategies. Given the rebound in stock markets, changes such as lowering exposure to risk-based assets (equities, for example) or an increase in hedging levels may be appropriate given the employer’s covenant strength.

What if the sponsor can’t both support the scheme and continue trading?

There are other options to consider but, from experience, they are neither easy nor quick to implement. We call these ‘radical surgery’ and they include regulated apportionment arrangements (RAAs) and company voluntary arrangements (CVAs). To succeed, a raft of conditions must be met, the pension scheme trustees must be in support and approval is needed from the regulatory bodies, which is where anti-embarrassment stakes might come into play. (See the PSGS blog part 2: radical surgery to learn more).

If the point is reached where a distressed scheme sponsor cannot be saved, securing the best possible outcome for pension members remains vital. Eyes will turn to the Pension Protection Fund (PPF), but the key question is… does the scheme qualify?

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With many new issues to face, a DB scheme may feel like one challenge too many.

PSGS appointed to Pension Protection Fund Trustee & Support Services Panel


PSGS has also been appointed to the new restructuring and pre-insolvency services panel.


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After 40 years of experience in the pensions world, I'm sharing my insights.