Comment on TPR's guidance on protecting schemes from sponsor distress
12 Nov 2020
Commenting on The Pensions Regulator’s guidance on protecting schemes from sponsoring employer distress, 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.”