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Freshfields Risk & Compliance

| 2 minutes read

UK Pensions Regulator urges trustees to be prepared for sponsor distress

With the UK currently in the middle of its second lockdown, and companies facing further economic challenges, the Pensions Regulator has published guidance for trustees of defined benefit pension schemes urging them to take steps to be prepared for signs of sponsor distress to ensure that opportunities to protect the position of members of those schemes are used to maximum effect.

The key message from the Pensions Regulator is clear: trustees should ensure they have a seat at the table in any discussions between employers and other stakeholders at an early stage to maximise leverage for their position.   Whilst the guidance has only just been published and is aimed at pension trustees, it is reflective of the Pensions Regulator’s ongoing pressure on corporate sponsors and other stakeholders to engage with trustees in restructuring discussions at the earliest opportunity and for pension trustees to engage effectively to ensure that their defined benefit scheme is treated equitably with other stakeholders. 

That such engagement is appropriate and can be highly effective, not just to best protect scheme members but also to help give the best chance of a sustainable recovery for distressed sponsors, is undoubtable.  We have seen trustees successfully follow this approach in a number of recent restructurings to secure significant additional protection for members of defined benefit schemes, whilst in turn providing crucial support for sponsors’ restructuring proposals.

The starting point for effective engagement is being informed and prepared.  The guidance sets out a number of actions that trustees should already be taking to ensure they are in a position to be able to engage at the earliest opportunity with corporate sponsors and other stakeholders including:

  • adopting an integrated risk management approach, including workable contingency plans and suitable triggers to warn them when employers are in distress;  
  • reviewing their scheme governance to ensure the trustee board has appropriate experience, structures and processes to help make effective decisions to manage risks and protect members;
  • monitoring the covenant that supports the plan to identify key risks that could be a sign of corporate distress such as profit warnings, cash flow constraints, credit downgrades, breaches of banking covenants and debt refinancing; and
  • agreeing a formal information sharing protocol with corporate sponsors to give trustees sufficient visibility of events that impact on the covenant.

If their sponsor does start to show signs of distress, pension trustees need to act.  The guidance brings together a number of helpful considerations for pension trustees when doing so, including emphasising the importance of:

  • understanding the position of the scheme ad the trustees’ leverage;
  • understanding the position and leverage of other key stakeholders; and
  • using that understanding to ensure that opportunities to protect the scheme’s position are appropriately maximised, including in particular where concessions or support are sought from the scheme.  

By putting the spotlight on these considerations, the guidance provides a helpful resource for pension trustees in considering how to protect their schemes from the risk of employer distress – but also a useful reminder for sponsoring employers and other stakeholders of what they can, and should, expect from pension trustees.


europe, restructuring and insolvency, pensions