Pensions Employer Covenant and Restructuring

M&A activity, raising finance or corporate restructurings all have potential to disrupt pension schemes. As a team we have worked on some of the biggest M&A deals in recent years, frequently alongside our colleagues in the wider restructuring practice and other areas of specialism to ensure that we bring the best of PwC to every client situation.

• All angles covered: In addition to technical and financial due diligence advice we provide to corporates and trustees, we believe understanding the regulatory or moral hazard implications of corporate activity on a scheme is fundamental for a successful outcome.
• Unparalleled regulatory insight: Many of our people have seconded to The Pensions Regulator so we understand TPR’s perspective and its key considerations.
• Achieving consensus: Providing our clients with clear advice and committed support in negotiations where needed has proven to facilitate better corporate/trustee relationships and resulted in mutually beneficial outcomes.

Whether in distressed situations or for strategic reasons, proceeding with a scheme structuring can be challenging and complex for trustees and corporates, we’ll help navigate you to a successful outcome.

• Proven track record: We have led more scheme compromises with the PPF via Regulated Apportionment Arrangements (‘RAAs’) than anybody else. Our experience best places us to deliver the result you need.
• Investment in stakeholder relationships: We believe early engagement with the regulator and collaboration with all stakeholders is key to reaching cost-effective and improved structuring outcomes.
• Honest representation of facts and risks: Imposing solutions on stakeholders often leads to resistance. Success stems from clear transparent knowledge and this sits at the heart of our advice.

Other examples of services include guidance through flexible apportionment arrangements (“FAA”), the set up of escrows and trusts and considerations of the Pension Regulator’s moral hazard powers.

ESG is now becoming a core focus for many of our clients, as well as an area of increasing regulatory scrutiny. At our 2021 Pensions & Restructuring Lawyers Event, more than 50% of attendees said that ESG should be a key risk to consider when assessing long-term covenant. Core ESG areas we are focusing on within our covenant assessments include:

• Climate-related or Net Zero exposure (across sectors and geographies)
• Scenario analysis (including TCFD requirements)
• Longer-term covenant view and impact of global or national shifts and ‘megatrends’
• Management perspectives and action plans
• ESG-linked employer financing
• Interplay with Integrated Risk Management and assessing how the ESG covenant exposure interplays with the investment ESG strategy.

Our covenant team work alongside our dedicated experts in the Sustainability and Climate Change team to draw on cross-industry expertise, data analytics tools and breadth of experience to provide our clients with leading insights and advice.

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Tailored approach

We develop bespoke monitoring frameworks, tailored to the specific circumstances and covenant risk and value drivers of the client and the scheme, be it simple or complex depending on the scenario required. We have created monitoring frameworks for a wide range of clients, across many industries, and we would leverage our experience to develop an approach which monitors the key covenant and affordability metrics for your scheme(s).

Recommend flexible frameworks

Factors such as, the risks facing the scheme and regulation, change over time (e.g. in response to C-19) and it is also important to continually review and update a monitoring framework to ensure it remains valuable and relevant and continues to support our clients in their decision making. This ensures that trustees and sponsors alike can monitor the covenant regularly between formal reviews and have well developed contingency plans so they can take prompt and effective action when required, in line with the Pensions Regulator's guidance.

We apply a risk based approach

Within all monitoring, our aim is to support our clients in decision making and identify areas where further consultation with the sponsor or the trustee or an alternative action may be required. To assist our clients in their decision making, our frameworks include a flagging system that highlights key areas of risk based upon pre-determined ranges. We also seek to suggest appropriate mitigation measures.

Technology efficiencies

Our data analytics and automation tools will help deliver fast and reliable monitoring. We have invested in digital solutions that enable us to process data and solve problems at speed, as well as enabling us to present our findings clearly and interactively.

Given the new DB Funding Code, the increasing maturity of schemes, and TPR’s guidance for Trustees and employers seeking to reach certainty for members, there is an increasing focus on considering end-game options for schemes.

We, alongside our colleagues in the wider Pensions network, can help you to understand the right strategy for your scheme through:

• Understanding relevant cash flows;
• Stress testing to understand the factors that could prevent member benefits being paid out in full; and
• Testing the options available to ensure that outcomes are improved.
  

• TPR’s guidance makes clear that it expects Trustees and sponsors of weaker schemes, perhaps with a distressed sponsor, to carry out contingency planning.
• This focuses on considering how the covenant could change in future under various downside scenarios and develop plans to mitigate the risk - e.g. financial distress of an employer (considering insolvency protections), material deterioration in the scheme’s funding position, or one-off events (e.g. significant market disruption).
  
• Agree the format of any contingency planning - we have received positive feedback from clients where we have run this as an interactive session with the company, trustee and other advisers.

In 2021, we helped 15+ trustee clients validate the value of their group guarantee/ ABC for PPF levy purposes, and supported a further 15+ other companies and trustees with the management of their PPF levy.

• Close PPF relationship: Having supported the PPF in developing their latest levy methodology, and keeping abreast of developments means our team specialists are best placed to help corporates and trustees understand how the PPF levy rules apply to them.
• Understanding your levy bill: PPF levy calculations can be difficult to understand but by simplifying the rules underlying them, we can help you identify the key drivers affecting your levy.
• Minimising insolvency risk: Lower insolvency risk can drive a reduced levy on schemes. Among other things, we’ve successfully identified suitable PPF guarantees and contingent assets which have reduced our clients’ insolvency risk and therefore levy bill.

Transferring to a pensions consolidator is an emerging end game solution for Defined Benefit pension schemes. With untested guidance recently published by the Pension Regulator for sponsors and trustees, it requires careful planning and execution, supported by robust analysis and advice. We have significant experience of supporting clients in considering new solutions in the DB pensions market and navigating new regulations. We are here to support trustees and sponsors who are considering a transfer.

• Feasibility assessment: Our proportionate initial assessment tailored to your scheme will help you decide if transferring to a consolidator is the right option for you.
• Clearance application: We will support you in preparing the required Pension Regulator’s clearance application to demonstrate that the three gateway principles are met and other clearance criteria are duly assessed. Our extensive experience in delivering covenant advice in complex transactions best places us to provide the robust analysis you need.
• Lead advisor: A consolidator transaction can be a lengthy and complex process involving multiple stakeholders and procedures, requiring a broad range of technical expertise. As a cross-disciplinary Pensions team at PwC, we collaborate internally and externally to consider the whole picture and to bring you appropriate advice, tailored for your needs.
• Wider end game strategies: Consolidators may not be the appropriate solution for all and we are committed to helping you find and evaluate the right longer-term solution that best protects the benefits for members of your scheme.