LINCOLN PENSIONS’ QUARTERLY UPDATE ON COVENANT AND REGULATORY
DEVELOPMENTS
COVENANT QUARTERLY
LOOKING AHEAD TO 2021: KEY DEVELOPMENTS IMPACTING DB PENSION
SCHEMES
•In November the UK Government outlined plans for trustees to
block transfer requests, if they have concerns over where the funds
will be invested
•In November the Labour Party called for
UK pension funds to be carbon neutral by 2050
It has been a busy year for trustees, with COVID-19
necessitating close monitoring of sponsors’ requests to defer
contributions (in some cases), and funding level volatility. The
uncertainty from the pandemic is likely to last until economies can
reopen, which could be well into 2021.
Q4.2020
DB PENSIONS HEADLINES THIS QUARTER
Overleaf: Technical Updates, Ask the Analyst, and Data
Watch.
So, what does 2021 hold for DB pension schemes? The pandemic
will remain a concern, but trustees and sponsors will also need to
navigate regulatory change at the same time:
TPR’s draft revised code of practice on DB scheme funding is
expected to be launched in early 2021. Central to this will be
establishing a Long-Term Objective to guide maturing DB schemes
away from the ongoing sponsor reliance inherent in Technical
Provisions targets. This could mean increased funding demands in
the near term. As always, finance directors and trustees will need
to balance appropriate pension contributions against the
sustainable growth plans of the sponsor.
The Pensions Schemes Bill will bring changes to the notifiable
events regime and extend TPR’s information gathering powers. A
requirement for trustees to determine a strategy (with the
agreement of the employer) for ensuring that pensions can be
provided over the long term will also be introduced. The threat of
criminal sanctions for non-compliance or placing schemes at greater
risk, and new tests for issuing Contribution Notices are both
likely to ensure that the implications of the Pensions Schemes Bill
are prominent in the minds of all stakeholders.
TPR’s guidance on protecting schemes from sponsor distress will
be very relevant as government support is gradually withdrawn and
attention turns to addressing the economic damage caused by the
pandemic. This could result in increased sponsor distress and
restructuring. TPR’s guidance on protecting schemes is timely and
IRM and contingency planning remain central themes.
Q4.2020COVENANT QUARTERLY
DATA WATCH
SIGN-UPTORECEIVEELECTRONICVERSIONSOFCOVENANTQUARTERLY:[email protected]
Lincoln Pensions Limited is registered in England and Wales
number 06402742. Registered office: 10 Queen Street Place, London
EC4R 1AG. Authorised and regulated by the Financial Conduct
Authority.
Lincoln Pensions, 6 Bevis Marks, London, EC3A 7BA. T: 020 3889
6300 www.lincolnpensions.com
Monthly data Pre-UK lockdown average Post-UK lockdown
average
# o
f new
inso
lven
cies
in
Engl
and
and
Wal
es
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Jan
19
Feb
19
Mar
19
Apr
19
May
19
Jun
19
Jul 1
9
Aug
19
Sep
19
Oct
19
Nov
19
Dec
19
Jan
20
Feb
20
Mar
20
Apr
20
May
20
Jun
20
Jul 2
0
Aug
20
Sep
20
Developments in the regulatory landscape
We answer common covenant related questions
TECHNICAL UPDATES ASK THE ANALYST
Following the outbreak of COVID-19 and associated lockdown
during March 2020, the UK government introduced several economic
support packages to help businesses navigate the impact of the
pandemic. These measures appear to have been effective in
mitigating the number of company insolvencies over
this period, with insolvencies in each month since April 2020
being below the pre-lockdown average. Whether the number of
insolvencies remains at lower levels (or whether there could even
be a catch up) once governmental support is gradually withdrawn
will be the key question in the coming months.
Will the refinancing of a sponsor’s governmental support loan
impact the strength of the covenant?
The UK Government has set up multiple financial support schemes
including loans on better than market rates and, in the case of
Coronavirus Business Interruption Loans (CBILS), the Government
pays the finance costs and fees for the first twelve months.
But when these loans mature and become due, sponsors may find
themselves unable to repay the loan and retain enough liquidity to
withstand ongoing shocks. If sponsors can refinance their loans,
new terms may be less favourable, with higher financing costs
reducing ongoing profitability.
Although these loans have provided invaluable support to UK
businesses, the long-term implications are yet to be observed and
cannot easily be avoided. The challenges surrounding refinancing
could exacerbate ongoing challenges for sponsors that are still
experiencing unfavourable trading conditions arising from
COVID-19.
Prashan Vicneswaran, Analyst
Corporate insolvencies amidst the pandemic
Regulatory guidance on foreign takeovers
The UK Government has introduced regulatory guidance on foreign
takeovers of UK companies that are deemed ‘sensitive’ for national
security purposes.
Foreign buyers of UK companies in specific industries will be
required to notify the Government in advance of a transaction,
undergo a screening process and receive Government consent before
the transaction is able to proceed.
The Government’s screening process is expected to take 30 days.
As a result, we may see more drawn-out M&A processes as
potential investors are required to undergo the review process
alongside existing approval hurdles.
Whilst market commentators have indicated that only a small
number of transactions are likely to fall foul of the new
regulations, trustees should be aware of this process when their
sponsor is involved in such a transaction.