11th Mar 2021

Despite best efforts, when a scheme is left with a severely distressed sponsor – what are the options?

In my previous blog, I wrote about the importance of a trustee’s ability to manage a scheme’s creditor position where the employer is facing financial challenges. I set out some practical steps we employ with our own clients to ensure that the scheme’s position is being protected as far as possible and that other creditors are not stealing a march at the expense of members. If the government’s roadmap of a “return to normality” by June 2021 is borne out, we may well see many struggling employers begin to recover.

There will also be situations where structural changes or simply a general change in consumer habits, accelerated by Covid-19, have materially weakened the employer’s viability. We think that this will inevitably lead to an increase in restructuring activity, particularly in cases where other creditors (such as lenders) take action to recover sums owed. However, in many cases, the scheme deficit is so large that it dwarfs all other creditors. If all possible steps have been taken to secure covenant support but the scheme is left with a weak sponsor with low affordability and significant scheme/PPF drift, what happens then?

We think that this is one of the most challenging situations for a trustee to face. We are likely to observe sponsors seeking further deferrals or reductions of DRC’s in order to help to keep their business afloat. However, there is a risk of criticism (or worse) if the situation is allowed to continue and PPF entry occurs at a later date when the scheme’s funding position might have markedly deteriorated. It is also still the case that many employer management teams see pension schemes as a “soft creditor” and may not fully appreciate the regulatory guidance that trustees must follow. Given this complexity of timing and perspectives, it’s critical for trustees to seek and understand the right level of advice at the right time in an attempt to ensure a positive outcome for all stakeholders.

If the employer can demonstrate a credible value creation plan, showing that the scheme’s position as a creditor and that of other creditors should improve over time, this will provide some comfort and justification for allowing the situation to continue. Covenant advice is key in assessing the employer’s business plans together with both short and long-term prospects. However, if it is found that there is no realistic prospect of the employer being able to address the position, further deferrals of DRC’s might be deemed simply to be kicking the can down the road and firm action, however unpalatable, may well need to be considered.

Trustees may have the power to wind up the scheme or otherwise force an insolvency of the employer. However, this is likely to be an extremely difficult decision to take when considering the best interests of the scheme’s members and it should be borne in mind that an unplanned insolvency rarely results in the best outcome for creditors. This is where a professional trustee with restructuring expertise can add real value; it’s certainly where 20-20 Trustees have the breadth of experience and knowledge to help.

In these scenarios, we believe that an open and honest discussion, together with ongoing communication with the employer, is vital. The employer’s directors should be mindful of their duties to creditors, especially given the additional powers available to The Pensions Regulator set out in the new Pension Schemes Act 2021. It is very important for all parties to be taking the right legal and covenant advice in these circumstances. A good working knowledge of restructuring options and practices allows trustees to hold a productive conversation and, potentially, assist in procuring the right outcome for all stakeholders.

At 20-20 Trustees, we have significant experience in dealing with distressed employers and a dedicated group of restructuring experts to help address such challenges. In most cases, carrying on and seeking to fund members’ benefits over time will be the right choice but we also ensure that, when this route is not appropriate, there is a contingency plan in place to protect the scheme’s position.