Pension trustees should prepare for the effects that the proposed Corporate Insolvency and Governance Bill may have on the relationship between schemes and struggling sponsors, according to Squire Patton Boggs.

The law firm said that the bill, which is currently passing through parliament, has the potential to upset the “delicate balance” between pensions and corporate insolvencies.

It warned that it would be especially relevant for the trustees of schemes linked to sponsors with weak or weakening covenants, for example those in a sector hit hard by Covid-19.

Squire Patton Boggs partner, Philip Sutton, added: “Even though the bill is not yet law, such trustees may wish to reassess what ‘tools they have in the box’, consider how a surprise moratorium would change that and increase the frequency of their scrutiny of the sponsor.

“Trustees facing requests for extensions to deferrals of deficit reduction contributions may also wish to consider if the change in landscape affects their view of the proposal.”

The bill has been drafted to give companies more breathing space in the event of insolvency, with a proposed new moratorium process allowing directors to continue running the company under the supervision of a ‘monitor’.

During the process, a company would have a payment holiday, including on deficit recovery payments.

If a firm becomes insolvent within 12 weeks of the process ending, some pre-moratorium debts, but not unsecured pension deficits, would be elevated to “super-priority status”, which would further dilute or eliminate the amount available to the pension scheme or Pension Protection Fund (PPF), according to Squire Patton Boggs.

The law firm said that a likely consequence of the bill would be trustees seeking increased security from sponsoring employers or greater control of winding-up triggers in future funding negotiations.

It added that there could be further changes to the bill, as it is sill in draft, and there has been support in the House of Lords for the moratorium and restructuring plan to engage the section 75 regime or trigger a PPF assessment period.

Sutton continued: “This would be a seismic change which could result in large numbers of pension scheme members relying on PPF compensation in future.

“However, this may inadvertently limit the attraction (to companies) of a moratorium or restructuring plan if it also triggers the section 75 employer debt regime or the potential for The Pensions Regulator to consider exercising its anti-avoidance (or ‘moral hazard’) powers.”

The Pensions and Lifetime Savings Association (PLSA) recently urged the government to alter bill to avoid “unintended negative consequences”.

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