Another way to give DB employers relief?

Alternative funding methods have been a popular tool in the DB practitioner’s toolkit over the past decade. A look through the Pensions Expert archives reveals a slew of employers pledging escrow accounts or setting up special purpose vehicles in 2015 and 2016, with paint manufacturer AkzoNobel setting up an escrow account as recently as last year.

These assets act as guarantees of member security, but some have suggested that if trustees release exchange liquid assets for alternative arrangements, companies could tap a fresh source of pandemic liquidity without endangering member benefits.

It’s very difficult for trustees to release some existing security, particularly if they have material concerns as to the short to medium-term survival of the corporate

Philip Goss, Linklaters

According to Philip Goss, partner at law firm Linklaters, the easiest instance of this exchange to imagine would be where a scheme has been given security over a cash escrow account. “They could exchange that for security over another asset, which is perhaps less liquid,” he said.

Parting with cash that is redeemable upon the employer’s insolvency may seem unthinkable to trustees, and indeed is likely to be so in any situation involving a weak sponsor.

“It’s very difficult for trustees to release some existing security, particularly if they have material concerns as to the short to medium-term survival of the corporate,” said Mr Goss.

“They may be releasing it at the exact time that they put it in place to protect them.”

Arrangements must be covenant-neutral

The guiding principle then, should be that any such arrangement is covenant-enhancing, helping an otherwise healthy and successful company to weather an unprecedented liquidity crisis. In this situation, “the trustees are much more likely to be able to release the security”, Mr Goss said.

However, it remains to be seen how many sponsors are able to fulfil these criteria. As it stands, LCP analysis suggests that only 10 per cent of companies will be granted an alteration to their contribution schedule.

The proportion of companies that have both pledged a liquid security to their scheme and have a palatable alternative to exchange may be significantly smaller.

“Releasing security, in whatever form it may take, is something that should not be considered lightly as, by doing so, the position of the scheme is likely to be changed – moving from secured to unsecured creditor perhaps unless another form of security is being provided, of similar or greater value,” said Simon Kew, director and head of strategy and relationships in Deloitte’s pensions practice.

For those who are not offered an alternative security, “while it may be helpful for an employer’s liquidity to access funds held within an escrow account, trustees [and the Pensions Regulator] would be  understandably cautious in considering such a move”, Mr Kew warned.

Regulator cautious

A spokesperson for the regulator concurred with this position, saying that trustees should continue to apply the same principles they are expected to follow when first deciding to accept a cash alternative - the asset must be sufficiently robust and have a realisable value that compensates for the extra risk they are taking in their funding plans or investment strategies.

"In this example, a pool of cash is likely to have more certain value to a scheme in a downside (for instance, an insolvency) than an alternative asset (such as property)," the spokesperson said. "In any event, where trustees are being asked to give up legal rights over one asset in exchange for security over another, they should carry out thorough due diligence, including expert advice, on the proposal and feel confident that entering the new arrangement would be in members’ best interests."

Anne-Marie Winton, a partner at Arc Pensions Law, suspected that these opportunities could be few and far between

“Is it likely that there is an unencumbered asset that can be made available?” she asked. “What’s the likelihood that businesses have freehold properties [that are not already mortgaged]?”