Sponsors of defined benefit (DB) pension schemes are facing a double whammy. 

As the Government Covid support starts to unwind with the ending of the furlough scheme and firms face up to repaying loans from the Coronavirus Business Interruption Loan Scheme (CBILS), many companies will be looking to refinance or restructure. A handy summary of the various Covid support measures can be found on BDO’s website.  However, to add a further layer of complexity, those companies with a DB pension scheme will need to consider the Pension Regulator’s (TPR) increased powers, which came into force on 1 October 2021.

From this date, it becomes a criminal offence to engage in conduct which risks the accrued benefits or avoids the payment of a section 75 debt of a DB pension scheme. Corporate activity which could potentially weaken the support to a DB pension scheme – such as refinancing or increasing borrowing levels – could therefore be caught by this new power should the sponsoring employer run into difficulties in the future.

In addition, two new tests from TPR for issuing a Contribution Notice in relation to corporate activity that has a detrimental impact on a DB pension scheme also came into force. The Employer Solvency Test and Employer Resources Test look to consider whether a sponsoring employer is sufficiently well-resourced after a corporate activity (such as refinancing) to support the DB pension scheme.

All of this means that it is important to ensure the impact on the DB pension scheme is considered as part of any corporate activity.

BDO's business restructuing partner, Sarah Rayment, alongside tax partner Jon Claypole and business advisory partner Mark Lamb, said: "We are encountering many situations where businesses and organisations have used the support measures available, but have not necessarily understood or planned for dealing with the impact of the measures being withdrawn and loans or deferrals needing to be repaid. For example, when companies start to repay their CBILS loan it will have an immediate impact on cash flow and it will be interesting to see whether this repayment has been included in their financial modelling and forecasting scenarios.

"As HMRC are actively investigating Coronavirus Job Retention Scheme (CJRS) claims there are considerable tax charges and penalties for incorrect reporting of receipts, all of which adds to the pressure businesses are currently facing."

It is important to make sure you, and your scheme, are prepared. DB schemes and their risks are complex but taking the time to engage with your scheme’s trustees to understand and mitigate these risks is likely to make your next refinancing process more straightforward. Providing more information about DB pension risks up front is also likely to make this process quicker and more efficient, and can answer a lot of questions that lenders might have in advance.

Framing any pension scheme impact and mitigating actions as part of a long-term DB scheme strategy agreed by all stakeholders will be key. The best defence against falling foul of the new Regulator powers is to ensure that there is a robust decision-making process that is well documented, showing that the scheme’s needs have been considered.

Cash is king

As the support measures are withdrawn, companies are going to face increased cash flow pressure through increased wage bills and Covid loan repayments. The DB pension scheme deficit contributions will also still need to be paid. All this needs to be factored into cash flow forecasts, which will in turn influence the pension scheme trustees’ view of the strength of the employer covenant.

Matthew Gibson, pensions covenant advisory partner at BDO, says: "The government has provided significant short-term financial support to UK businesses during the pandemic. However, pension scheme obligations are long-term and pension schemes require employers that are viable not just in the short-term.

"Pension scheme trustees should be monitoring their employer covenant and, where there are signs of financial stress/distress, should ensure the pension scheme is being treated equitably in accordance with TPR’s guidance. Trustees should also make sure the sponsor’s forecasts allow for these factors in order to determine whether there is sufficient cash available (with suitable headroom) to continue to pay the required contributions to the pension scheme, and to ensure the scheme’s potential outcome on insolvency is not being prejudiced."

Integration with long-term strategy and financial risk control

Pension schemes expose their sponsors to a number of risks. The financial risks are the obvious ones, which fundamentally boil down to the contributions required to fund the scheme, the ongoing costs of administering it and the volatility of these. There are also operational and reputational risks to think about. Governance is another key area of focus for TPR and it is important to ensure that schemes are being efficiently run with robust processes, reducing the risk of, for example, paying incorrect benefits.

The key to managing the financial risks is to think about your long-term objective for the scheme. This focuses decisions made now to make sure the scheme continues to navigate its way towards that objective, making sure the level of risk being taken is appropriate for where the scheme sits on its journey. This will involve de-risking along the way, either on the asset side through increased “matching” of assets to liabilities, or on the liability side through member option exercises, which give members choice and also potentially reduce (and, in some cases, change the shape of) the sponsor’s exposure.

Many sponsors will likely have had preliminary discussions on long-term strategy with their scheme trustees as TPR increases its focus in this area. As noted above, the trustees can be key stakeholders in refinancing discussions given the potential impact of this on the employer covenant (i.e., the sponsor’s ability to fund the scheme).

Refinancing, restructuring or other corporate activity therefore presents a good opportunity to engage with the trustees on the ‘endgame’ for those that have not done so already, or to revisit existing plans for those that have. Either way, being able to show that the scheme is following a well thought through plan will be looked on favourably by lenders or buyers, who will then have a better idea of the sponsor’s financial commitments and timescales.

How we can help

At BW, we can help you assess your scheme’s long-term strategy using our DB Navigator framework to ensure it balances the needs of all stakeholders and enables corporate events such as refinancing and restructuring to be conducted in a robust and efficient manner. We can support your discussions with lenders and trustees so that your DB scheme is not a barrier to a successful outcome.

Contact us for all enquiries

For more information about the independent, expert services we provide in this area, speak to our team today.


Get in touch

Stay up to date

Get the latest independent commentary and exclusive insights from a range of experts at the forefront of pensions, investment, insurance and risk – tailored to your preference.

Subscribe today