The effects of the Covid-19 pandemic are wide ranging and will be felt for some time yet. This statement could apply to all walks of life and the defined benefit (DB) pensions arena is no different.
Right at the start of the pandemic there were the immediate considerations around the deferral of the payment of future contributions from the sponsor and suspensions of transfer values, not to mention what it may all mean for future mortality rates. At the time sponsors also looked to their existing lenders to help them out, for instance by providing them with liquidity through draw down and / or an extension of their facilities.
Fast forward to today and we now face challenging economic headwinds. The reasons are many, varied and debatable. What is not contentious though is that inflation has been largely out of control during 2022 and interest rates have been rising. Such an environment makes refinancing for sponsors even more challenging.
So, when sponsors are seeking to refinance in the current economic environment, what are trustees of DB schemes supposed to do?
First and foremost, trustees need to understand how sponsor refinancing can affect the sponsor’s covenant strength. David Fairs of The Pensions Regulator published a blog on this over the summer and he noted the following six key areas that could have an impact: interest costs and fees, debt structure, security / guarantees, financial covenants, restrictive covenants, and counterparty. For those of you who are interested in the details, Fairs’ blog can be accessed here:
It is well versed that the best run pension schemes enjoy a true partnership approach between the trustees, sponsor, and the respective advisers. And this means an open dialogue and regular flow of information between the parties, including matters relating to any sponsor refinancing.
Trustees should also be aware of their rights to information. The Scheme Administration Regulations provide:
“It shall be the duty of any person—
(a) who is the employer or has been the employer in relation to an occupational pension scheme and any person who acts as auditor or actuary to such a person, to disclose on request to the trustees or managers such information as is reasonably required for the performance of the duties of trustees or managers or professional advisers;
(b) who is the employer in relation to an occupational pension scheme within 1 month of the occurrence, to disclose to the trustees or managers the occurrence of any event relating to the employer which there is reasonable cause to believe will be of material significance in the exercise by the trustees or managers or professional advisers of any of their functions.”
Tellingly, in a clear signal to trustees to be vigilant, at the end of his blog, Fairs commented, “Trustees are the first line of defence in the assessment and mitigation of corporate events that impact covenant, including refinancing.”
Given the potential impacts of refinancing on the sponsor’s ability to continue to support the scheme both now and in the future, it is vital therefore that trustees are part of these discussions.