A rise in corporate restructuring due to challenging economic conditions will mean employers and trustees must be more vigilant in managing the employer covenant available to their pension scheme, according to the latest Insight report from Punter Southall Transaction Services (“PSTS”).
With the level of corporate defaults expected to rise this year, an increasing number of businesses are set to undertake financial or operational restructuring to avoid insolvency, financial distress or significant deterioration in trading performance.
Premier Foods, TUI Travel, JJB, Logica, and Punch Tavern are just a few of those companies that have all undergone some form of restructuring recently. Companies with defined benefit schemes may be particularly vulnerable to material changes in the strength of the employer covenant.
PSTS’s Lorant Porkolab, who leads the covenant advisory team at Punter Southall, is urging decision-makers to make sure they consider the impact. He said: “Many restructurings affect the legal shape of the business. It is critical for trustees to understand where this leaves the pension scheme and its sponsoring employer.
Meanwhile, an analysis of the corporate experience of FTSE 100 Index over the past 25 years by Gazelle Pensions Advisory found the principal risk to scheme funding may not be the default of the sponsor but the gradual erosion of the pension “promise” over time as a result of corporate transactions, strategy and performance.
The findings should cause pension scheme trustees to adjust their expectations of the level of funding risk their schemes are likely to experience over the next 25 years and questions whether the current regulatory framework effectively deals with this. The analysis found that even with “blue-chip” companies supporting their schemes, trustees have experienced a high level of risk to pension scheme funding.
Simon Willes, chairman of Gazelle, commented: “These findings highlighting 25 years of relevant covenant experience offer a valuable insight for pension trustees into what they can expect to experience over the remaining lives of their schemes.
“It is not clear that the current pension regulatory framework which has striven to improve the protection of pension schemes on default, effectively deals with the risks to pension scheme funding posed by corporate activity and change. The transaction clearance regime originally showcased is voluntary and appears to be now largely ignored by companies and their advisers. If regulation is about ensuring pensioners do receive pensions from defined benefit schemes, then elevation of the status and ranking of pension schemes from long-term unsecured creditors is central to the debate.”
Author: Pensions WorldPensions World is the leading monthly magazine for pensions professionals published by LexisNexis.