Stressed Schemes

Understanding the level of pension risk a company and its pension scheme face is critical to determining the best course of action when the company is struggling.

If the pension scheme covenant is weak and deteriorating, and augmentation is not sufficient, the trustees are faced with raising their technical provisions at exactly the time the employer cannot afford it. This can be the start of a vicious cycle as control passes from the employer to the creditor. The employer and scheme start to slide down the corporate demise curve.

As the corporate sponsor, it is important to know the level of pension risk. Do you view the pension scheme as a creditor, partner or owner of the group? TPR have identified four employer risk zones to help with understanding where schemes sit:

  1. Comfort Zone (the scheme is a material creditor but manageable)
  2. Concern Zone (the S75 buy-out deficit is more than the enterprise value of the employer)
  3. Crisis Zone (the scheme’s S75 claim is so large that it cannot reasonably hope to ever pay off the pension obligation but can achieve above PPF level of benefits)
  4. Catastrophe Zone (where the scheme is destined for the PPF through some form of insolvency event).

Around 40% of schemes in this current economic environment find themselves in the Concern Zone, and c. 20% are in each of the other three zones (source: Experian).

By understanding where your group sits on the funding spectrum, you will better understand the underlying motivation and obligations of the trustees, and how best to negotiate the best financial solution for all your stakeholders. This will enable a company to put in place a clear strategy to address issues over a realistic time frame that will reduce the impact of the scheme on the business.

External and/or internal corporate events can have a significant impact on covenant strength. We provide a clear assessment of the covenant strength in situations where the scheme is stressed/distressed and where there is a material risk of a PPF event.


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