Earlier this year in our more flow, less friction series, we flagged that if you have a defined benefit scheme (DB Scheme) in your group, the approach taken by your lenders to any new financing is likely to change as a result of The Pension Scheme Act 2021 and the increased powers of The Pension Regulator (TPR). 

In a blog released this week, TPR has spelled out in more detail the level of scrutiny that trustees of DB Schemes should apply to new financings.

When you approach a new financing, it's not just your lenders who will apply more scrutiny - that scrutiny will also come from the DB Scheme trustees. Note that for these purposes, a new financing will include simply extending existing facilities.

What must you do?

As an employer under a DB Scheme, you must proactively disclose to DB Scheme trustees:

  • the details and draft legal documents relating to any financing, and in good time well before a transaction completes and
  • any financial forecasts and similar information provided to lenders. 

This applies irrespective of whether the financing would have no impact or even a positive impact on the pension scheme.  

What must the DB Scheme trustees do?

DB Scheme trustees are expected to consider the detail of the new financing, not just the big picture. So they must consider things like:

  • changes to the cost of the new debt and how this impacts your cash flow and your ability to fund the pension scheme
  • whether the debt burden varies over time
  • the impact of any security and cross guarantees on the likely recovery of the pension scheme in an insolvency
  • the likelihood of a breach of the financing terms
  • any restrictions on funding the pension scheme
  • the identity of the lenders and how any change might lead to a change of lending policy/approach

They will be assessing whether the financing prejudices the pension scheme and of so, what "mitigation" they should negotiate as the price for not objecting to the financing or raising their concerns with TPR.

What's the impact on the financing process?

When there is a DB Scheme, the financing process potentially becomes a 3 way negotiation – lenders, borrower and pension trustees. The pension trustees and their advisers should be involved from the outset and included in both structuring discussions and the detailed terms of the financing. 

In recent financings we've seen negotiations consider a range of "mitigation" options including considering:

  • whether the lenders should have any recourse to DB Scheme employers 
  • whether the DB Scheme trustees should have the same recourse and security as the lenders 
  • whether lump sum contributions should be made to reduce the pension deficit

All of this takes time and discussion to resolve. You'll need to work with your advisers to prepare comprehensively for, and navigate, these negotiations.

Key Contacts

Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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