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TPR’s guidance on protecting schemes from sponsor distress will be very relevant as government support is gradually withdrawn and attention turns to addressing the economic damage caused by the pandemic.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:ENQUIRIES@LINCOLNPENSIONS.COM

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.