Executive Director of Policy, Analysis and Regulatory Advice at the Pensions Regulator (TPR), David Fairs, detailed what the regulator expects pension plan trustees to Retirement and sponsoring employers consider when refinancing in the current economic climate.
In a blog post, Fairs noted that new macroeconomic challenges are emerging as the business world seeks to rebound from the Covid-19 pandemic, which could make refinancing more difficult for sponsoring employers.
Many sponsors have sought to bolster their liquidity as the UK responds to the pandemic, typically turning to their existing lenders to both downsize and expand facilities, he continued, as the return of a more normalized trading environment was likely to see a return of refinancing in a more traditional sense as well.
When refinancing, TPR expects employers and trustees to consider several elements, any or all of which could materially impact the employer’s commitment.
These include interest charges and fees, as changes in the cost of debt (interest and fees) could impact the employer’s ability to pay pension contributions; the structure of the debt, with the regulator expecting trustees to have a good understanding of any impact of replacing one type of debt with another; and securities/guarantees, trustees being advised to be aware of the implications of any change to claim priority over their potential insolvency outcome.
In addition, trustees are expected to consider financial covenants, as changes to these covenants could represent a transfer of power between trustees and lenders in the event of financial stress; covenants, as covenants that restrict the employer’s ability to undertake certain activities could restrict the ability of trustees to agree to appropriate funding plans or plan protections; and counterparty, trustees being encouraged to keep in mind that different lenders may have different risk appetites and objectives, and that changing lenders may facilitate engagement with trustees as a key stakeholder.
“While none of the above are new areas for administrators and employers to consider, a difficult and inflationary financial climate makes changes in these areas potentially more likely,” Fairs wrote.
“Despite continued momentum in some markets (e.g. asset-backed lending), credit conditions are tightening and larger refinancings have become more difficult, impacted by lender concerns about certain sectors, costs associated with climate change and ensuring an adequate return on investment.
“These conditions will likely result in higher interest rates and tighter covenants, with potentially more onerous security requirements and greater restrictions on the use of funds.”
He added that the regulator’s refinancing expectations of sponsors and trustees were “simple”: that it is essential to understand the implications of any refinancing on the pension plan and the employer’s commitment. , and to mitigate any harm caused.
“This understanding should extend beyond the base amount of debt to consider the areas highlighted above and any other factors deemed relevant,” he continued.
“Trustees should also be aware in their analysis of the risks that could arise if debt is not refinanced, such as the need to sell assets to meet financial obligations.
“Although this is not strictly a ‘refinance’, we also expect trustees to be alert to debt transactions. When administrators become aware of such a transaction, we expect them to work proactively with the employer and new lender to assess any changes in the employer’s circumstances or lending strategy, and any significant impact on the administrator’s assessment of engagement.
To support this, trustees have been urged to engage with management well in advance of any potential refinancing and employers should be prepared to share relevant information with trustees.
Fairs said trustees are the first line of defense in assessing and mitigating corporate events that impact engagement.
“As outlined in our Corporate Transactions and Authorization Guidelines, it is essential that trustees and sponsoring employers engage effectively to assess the extent to which a corporate event is detrimental to the engagement and agree to ‘adequate mitigation,’ he concluded.