Managing Stressed Schemes

In scenarios where the pension scheme covenant is weak and worsening, and augmentation proves inadequate, trustees may have to increase their technical provisions at a time when the employer is least able to afford it. This situation can trigger a detrimental cycle, shifting control from the employer to creditors and leading to a decline on the corporate demise curve.

For corporate sponsors, understanding the degree of pension risk is essential. How is the pension scheme perceived – as a creditor, partner, or owner of the group? The Pensions Regulator (TPR) categorises employer risk into four zones to aid in this assessment:

• Comfort Zone (the scheme is a significant but manageable creditor)

• Concern Zone (the S75 buy-out deficit exceeds the employer's enterprise value)

• Crisis Zone (the scheme's S75 claim is so substantial that full pension obligation repayment is unrealistic, yet benefits above the PPF level are achievable)

• Catastrophe Zone (the scheme is headed for the PPF due to insolvency).

Understanding where your scheme lies on this spectrum is crucial. It reveals the trustees' motivations and obligations, guiding negotiations towards the most beneficial financial solution for all stakeholders. This awareness allows a company to develop a clear, realistic strategy to mitigate the scheme's impact on the business over time.

Both external and internal corporate events can significantly influence covenant strength. We offer a precise evaluation of covenant robustness in cases where the scheme is stressed or distressed, and there's a material risk of a Pension Protection Fund (PPF) event.