The Employer Covenant Working Group has published a guidance paper on pension scheme transactions in distressed environments.

The guidance, Transactions in a distressed environment, has been developed by the Employer Covenant Working Group to assist practitioners in evaluating the impact of a range of distressed scenarios on the covenant of sponsoring employers, the risks to the security of member benefits and the advice that they may provide to clients.

The paper outlines key points for practitioners to consider. These include: professional judgement should be based on an integrated assessment of the risks to scheme funding, accounting for the broader financial context of the employer and scheme over all timeframes. When evaluating the impact of any distressed scenario, practitioners should be aware of the fact that a sponsoring employer may support more than on pension scheme and a scheme may also be supported by a number of employers.

Additionally, the ECWG notes that “any situation must be assessed proportionately and the respective scheme size, funding level, recovery plan and investment risk profile need to be considered in conjunction with the possible impact of the different scenarios on the respective employers.”

The guidance considers events where the financial strength of the employer is decreasing and suggests the duties of the respective corporate directors should be more focused on protecting the position of the creditors rather than increasing shareholder value. This could be where the sponsoring employer could experience changes in its on-going profitability and cash generation and/or in its underlying balance sheet position, the paper states.

The paper continues to assess and provide guidance on longer term and temporary reduction in profitability and cash generation, corporate restructurings and turnaround strategies, insolvency options and mitigation.

An ECWG director Keith Hinds commented: “The Transactions in a distressed environment guidance has been developed by the ECWG to assist practitioners in evaluating the implication of a range of distressed situations for the covenant of the employer and the associated risks to the security of member benefits in defined benefit schemes.

“It considers the position of various stakeholders and the range of options available to sponsoring employers and Trustees when sponsor or scheme distress is evident and the nature and type of advice that members of the ECWG may be required to provide.”

The ECWG notes that the guidance should be acknowledged with the guidance, codes and statements issued with The Pensions Regulator and the Pension Protection Fund.

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