On the go: Companies and pension scheme trustees should take steps to protect their schemes and their employer covenant from the fallout of any refinancing that they have undertaken, according to David Fairs, the Pensions Regulator’s executive director of regulatory policy, analysis and advice.
In a blog published on August 10, Fairs acknowledged the trend of employers seeking to boost their liquidity in the aftermath of the coronavirus pandemic. This, he noted, would include the agreement of new borrowing facilities, or extension of existing agreements.
Fairs said employers and trustees should consider the issue of refinancing incurring interest costs and fees, which could in turn impact an employer’s ability to pay pension contributions.
He urged trustees to understand the impact of replacing one kind of debt with another, as well as the implications for any changes to claim priority in the event of an insolvency.
He also warned that changes to financial covenants “could represent a power shift between trustees and lenders in the event of financial stress”.
Restrictive covenants could limit trustees’ abilities to agree funding plans for their schemes, he added, while a change in lender “may also facilitate engagement with trustees as a key stakeholder”.
“Our expectations of sponsoring employers and trustees in the context of refinancing are simple,” Fairs said. “It is critical to understand the implications of any refinancing on the pension scheme and the employer covenant, and to mitigate — to the extent possible — any detriment caused.”
Beyond refinancing, Fairs advised trustees to be proactive in response to debt transactions, and told employers to provide the information trustees require in a timely fashion.
“TPR said, years ago, that trustees should think like a bank, which is a nice idea, if flawed,” said Teneo client development director Simon Kew. “Lenders will, almost always, call the shots in refinancing discussions.”
“Where trustees and their advisers can be proactive is in building strong, information sharing, protocols with their sponsors and to swiftly understand any potential covenant implications,” perhaps "with triggers and actions already in place and agreed with the employer," he added.
