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Guidance for DB scheme trustees whose sponsoring employers are in corporate distress

The impact of COVID-19 (coronavirus) and the measures taken to contain it have been swift and severe. This heightens the need for trustees to understand the corporate health of their defined benefit (DB) scheme’s sponsoring employer and consider any previously drafted contingency plans. You will need to consider this alongside any impact of falls in asset values on your scheme.

Engaging with the employer will be complicated by the many new demands on their time resulting from managing the impact of the situation and the fact that, with many fundamentals of business operations changing in a dramatic and unpredictable way, forecasting will be difficult. Nevertheless, as a key stakeholder, you should be kept informed with the best available information, but also accept that this will not be as robust as it would normally be.

Our Annual Funding Statement also provides messages relevant to all DB schemes, but particularly schemes with valuation dates between 22 September 2019 and 21 September 2020 (Tranche 15, or T15 reviews), as well as schemes undergoing significant changes that require a review of their funding, investment and risk management strategies.

Published: 20 March 2020.

Questions related to COVID-19 to ask your scheme’s sponsoring employer

You should ask your scheme’s sponsoring employer the following questions to help focus your discussions.

How have they considered how the impact of the virus and the measures to contain it may affect:

  • demand for the employer’s products
  • their business continuity plan (BCP) - including resource availability, including staff and materials
  • cashflow - employers should be preparing 13 week cashflows where there is a significant impact on cashflow

Are there any key payment dates in the next three months that will affect the business (eg rent quarter dates)?

What are the positions of lenders?

Are there any restrictions on using available borrowing?

When will the banking covenants next be tested and is it expected to be met?

For how long are current borrowing facilities expected to be sufficient?

Is the employer discussing further funding facilities?

Are funders seeking new security and, if so, what is the impact on the scheme?

What are the positions of key suppliers and creditors? Have they imposed any restrictions on normal credit availability or supply volumes?

What is the position of trade credit insurers?

What payments are proposed to associated or connected companies or shareholders in the next six months? Is this appropriate in the context of the directors’ primary duties to their creditors where there is uncertainty over the solvency of the employer?

What support is expected to be available for the employer under the package of measures announced by the Chancellor on 17 March 2020? What is the timescale for this and are any key conditions attached?

How is this likely to impact the ability to meet commitments to the scheme?

You should consider the likely significance of the impact on the scheme in line with our guidance on Integrated Risk Management. This should include consideration of whether contingent assets may be available to support the scheme, particularly if these are being sought by other creditors or concessions are being sought from the scheme.

You should also consider the approach taken by other creditors, shareholders and associated companies to ensure that the scheme is being treated fairly.

Where the employer requests to defer DRC payments

Understandably, we have seen a rise in the number of employers requesting deferral of deficit repair contribution (DRC) payments. We recognise that such actions may be appropriate in the current circumstances, but you should consider any request carefully to ensure that any support given is part of a co-ordinated and fair response across key stakeholders.

You should get clarity on the timing for requests, challenging deadlines which are unnecessarily short and making sure you receive adequate information to make informed decisions. This should include consideration of information you received in response to the questions above.

Principles to keep in mind when considering DRC delay requests

The key principles to underpin your consideration of any request are:

Establishing the need

  • Understanding the employer’s cashflow and drivers for the request.
  • Ensuring that payments will not be made to related entities or shareholders – group or payments to the shareholder.

Ensuring all parties are playing their part

  • Trustee support should be alongside other stakeholders.
  • In particular, banks should be supportive of the business rather than withdrawing borrowing facilities.
  • Where other parties are strengthening their access to the employer’s assets through security, you should ensure that the scheme is given a fair share of new security.
  • Putting in place agreements to prevent new dividends or intra-group loans.

Having a flexible ability to restart making DRCs

  • Given the difficulty forecasting, any suspension should have an end date but also triggers to restart if trading returns to normal

Ensuring you are well advised

This should include covenant and legal advice from advisers with experience in situations of corporate distress and restructuring

Getting the right information, taking account of what is achievable in the time available

Where timescales are very short, any concessions should be short term deferrals to enable information to be provided later for a more considered decision.

There are other elements of DB schemes, such as investments and liquidity that we will address in the coming weeks.

If you have immediate concerns with your scheme, contact us.