“Thanks for all your help!”
“Where PSGS are appointed to act in conjunction with an existing body of trustees, we have found that they are quickly able to fit in well and gain the trust and respect of their co-trustees. ”
“These days, Boards need real expertise on tap (with excellent back-up) to cope with a constantly evolving and more regulated environment. PSGS is geared to delivering that.”
“So much more proactive than the previous company. On the ball - thinking in advance of things needing doing - very proactive.”
“They have helped us save much more and created a cohesive plan to de-risk whilst building an integrated pension team.”
“Their pragmatic approach helps with quick and easy decision making. Another approach might have made things more difficult.”
One of the most difficult situations a pension trustee can face is where the scheme sponsor is distressed, meaning the risk of insolvency is high. Trustees owe a fiduciary duty to act in the best interests of pension scheme members but, as insolvency results in job losses as well as reduction in shareholder value, avoiding it is a good thing for members, employees and sponsors.
Events can move rapidly
The pension scheme itself may not be the cause of the distress but it is often a factor. For many schemes, liabilities have risen faster than assets over recent years leading to substantial funding deficits.
Pension trustees should regularly monitor the covenant the sponsor provides to the scheme but events can sometime move with alarming rapidity when cash is constrained. Professional trustees are often appointed when the position has already become critical. We’ve seen the whole range of scenarios and enabling the best outcome for members and sponsors is rarely straightforward.
It can seem like a vicious circle
If not already in place, they should obtain independent covenant advice to confirm the position. If the sponsor defaults in relation to the existing Schedule of Contributions or it is not possible to agree a valuation within the statutory deadline, the Pensions Regulator must be informed. It may be necessary to write to pension scheme members so they are aware of the position.
It may be possible for the scheme to continue with reduced contributions and a longer recovery plan. You may also need to reduce the amount of risk being taken in the investment strategy and to increase the prudence loading in the funding assumptions to reflect the weak covenant. These measures will in turn increase the deficit so it can seem like a vicious circle and the question will arise – can the deficit ever be paid off?
Try saving both the pension scheme and its sponsor first
If the ultimate destination for the scheme is the Pension Protection Fund (PPF), they would often prefer the scheme arrives at their door sooner rather than later. They’re not keen on ‘PPF drift’, you see (over time, more members move from deferred to pensioner status and become entitled to higher levels of PPF compensation).
If this isn’t a material issue and the dividend the pension scheme would receive from an insolvency is not eroded by the passage of time, two barriers to continuing the scheme are removed. If the scheme and sponsor can survive, they may benefit from more helpful financial conditions in the future and the sponsor may have the time it needs to turn its business around.
One of my clients - a UK manufacturing business - is a good example of this:
We assessed the proposed covenant as being unlikely to be able to support the pension scheme over the longer term unless financial conditions were especially positive. Robust negotiation resulted in several different proposals from the employer group before we agreed the trade and assets would be retained in the sponsor together with the property and rental income from a connected tenant.
The result was a viable recovery plan and completion of the 2016 valuation on a basis acceptable to tPR. The scheme and sponsor both continued.
It can be done!