What changes are impacting the pensions industry?
The outlook for pension schemes appears more uncertain than at any other time with many employers facing an increased risk of financial distress. Technological innovation has disrupted traditional industries that support defined benefit (“DB”) pension schemes and COVID-19 has had a devastating impact on economies and businesses across the world.
The Corporate Insolvency and Governance Act 2020 (CIGA 2020) introduced new insolvency mechanisms for UK businesses that could impact on how pension schemes are treated. The recent introduction of the Pension Schemes Act 2021 is likely to impact upon the options available for dealing with these employers in distress. The introduction of the new DB funding code is expected to expose employers unable to support their schemes; however, this recent legislation could impact on the options available.
Corporate Insolvency & Governance Act 2020
CIGA 2020 introduces two new statutory mechanisms; the Moratorium, which protects businesses from the action of creditors and the Restructuring Plan, a court approved process to restructure a business outside of an insolvency.
This legislation offers more flexibility and protections for businesses than the existing statutory mechanisms. It could become increasingly popular with employers looking to restructure their business.
Pension Schemes Act 2021
There is concern in the pensions industry that the new criminal offences and broad definitions in the Pension Schemes Act 2021 could capture a wide range of legitimate business activity and may deter corporate activity and restructuring, where there is a pension scheme involved.
In a worse-case scenario, if stakeholders are unwilling to implement transactions and restructuring solutions where there is a potential risk of severe criminal sanctions, then this caution could lead to unnecessary employer failures.
New Defined Benefit funding code
The new DB scheme funding code, expected in the second half of 2022, could potentially “flush out” non-viable schemes which have to date been able to take advantage of flexibilities in the current scheme funding regime to make a recovery plan work (e.g. back-end loaded or long recovery plans, out-performance, or excessive investment risks). These schemes, which have operated under The Pensions Regulator’s (tPR) radar for many years, may now become untenable.
Such schemes are likely to have weaker sponsors with affordability constraints and limited, if any, ability to provide the contingent asset support necessary to achieve a satisfactory position under the Bespoke approach. tPR comments in its funding consultation paper that the new funding regime is likely to put these schemes in the spotlight, but also acknowledges that there are few other regulatory tools at present to improve the outcome for those schemes.
The challenges for managing distressed schemes are significant. Taken together these developments will add complexity and risk to already difficult situations. Our advisors at BDO are available to help you understand the potential impact these new developments and assist you in navigating through employer distress.
Download our Safeguarding Your Pension Scheme Against Financial Distress flyer which summarises the key elements of the tPR’s guidance for trustees in how to protect schemes against financial distress.
If you would like to discuss any of the points raised in the article or on our flyer, please contact Jo Harper. You may also be interested in reading further on a full range of pensions covenant and business restructuring scenarios.