Navigating sponsor distress: an action plan for trustees
12 Nov 2020
The impact of COVID-19 and the measures taken to contain it have been swift and severe. With many companies continuing to face an uncertain future, it seems inevitable not all DB schemes’ sponsors will survive. As government support winds down many are predicting a sharp rise in distress cases and restructurings, some of which will involve pension liabilities.
Amidst this backdrop, The Pensions Regulator has released new guidance for trustees on protecting schemes from sponsor distress.
Here we look at some of the key areas for trustees to consider in this difficult situation:
Early warning is key, so push to have legally enforceable information sharing protocols in place
The more distressed a sponsor becomes the less opportunity there is to improve outcomes, especially once other stakeholders are competing for value alongside the scheme. Things can change quickly so keeping channels of communication open between trustees and the sponsor and getting the right monitoring information in place (with clear triggers) are crucial in difficult times. Testing different potential future scenarios will also help to assess risks and inform decisions.
Ensure fair treatment when it comes to renegotiating contributions
Although this could offer necessary short-term breathing space, trustees should make sure that supporting the sponsor will be in members’ best interests and shareholders and other creditors are also ‘leaning in’ proportionately to support any turnaround plan.
Get involved and be vigilant to others seeking or enforcing security ahead of the scheme
Watch out for lenders negotiating improvements in their position. Where companies may be in refinancing or restructuring talks to help the business stay afloat, trustees should be particularly alert to actions diluting value for the scheme. Trustees should have a seat at the table to influence discussions at the earliest opportunity, or risk getting left behind.
Put in place legally enforceable contingency plans to mitigate risks
A range of actions can help such as obtaining security over assets or getting a negative pledge not to grant security to a third party. More options are likely to exist the earlier trustees and sponsors engage.
Be ready and able to reduce investment risk at short notice
De-risking could help prevent further losses and assets may need to be moved quickly if the covenant deteriorates. Think about increasing liquidity especially where sponsor contributions are being used to meet pension outgo.
The earlier you take action the more you can improve scheme outcomes. Thinking through the potential steps and the contingencies you could put in place is a good place to start.
If you would like to know more, or have any questions, please don't hesitate to get in touch or contact your usual Hymans Robertson consultant.
If insolvency is inevitable, the considerations shift towards addressing more practical concerns such as ensuring trustees have access to scheme data and records and preparing for PPF assessment. We cover this in Help! My sponsor’s going bust!