The 2021 outlook for restructuring – A time for collaboration, imagination and creative scenarios
Thoughts from December 2020: As businesses across the UK re-emerge from a second national lockdown and prepare for the year ahead, it is difficult to gauge the full extent of the economic damage.
Is it going to be as bad as people think? The headline administrations of Arcadia and Debenhams have closed out a torrid year for British businesses and The Pensions Regulator has set out guidelines for trustees on rising sponsor stress, a reflection of its expectations for what could lie ahead. That is not to say we should be anticipating widespread catastrophe in 2021, but rather that some challenges may come home to roost next year.
While the first vaccine approvals provide a much firmer footing for hopes of economic normalisation in 2021 and a much-needed boost to consumer confidence, the reality is that all the debt built up throughout 2020 either through increased borrowing and/or deferred payments to creditors will need to be repaired or addressed in some way.
Bumps in the road
We expect the second quarter to present the biggest bumps in the road. As things stand, current government supports – the extended furlough, tax and business rate deferrals, commercial property rent holidays which have so far provided a critical underpin – have been pushed out, with widespread expectation for an even harder spring, following a very tough winter.
As we have already seen over the recent months, many companies will not come through this period in one piece and will require restructuring – that will include some companies which have pension schemes. We anticipate distressed scenarios to play out or accelerate around specific sectors, notably those already facing structural headwinds (e.g retail) and those significantly impacted by COVID-19 (such as hospitality).
Brexit also remains the great unknown for those industries already in difficulty, automotive among them, where Brexit and COVID-19 have dealt a double hit, compounding the challenges of structural, societal shifts already in train.
Many companies and management teams have of course shown themselves to have been robust throughout the course of the pandemic and, indeed, some have performed well because of it. As such, we are hopeful that there will at least be what is described as “K” shaped economic recovery, with many companies recovering rapidly even as others struggle to get back on their feet.
Furthermore, while we expect an increase in insolvencies from the number seen so far, largely avoided through government policy supports, we do not expect to see a scenario in which the backstop to the UK pensions industry – the Pension Protection Fund (PPF) – is put at risk.
The PPF has a huge amount of reserves, invests like an insurer in terms of solvency ratios and it does not appear that companies with very large multi-billion pound schemes are facing large scale restructuring or insolvency. Indeed, some of the companies worst-hit by COVID-19 have extremely well-funded schemes, evidencing that prudent, integrated risk management is already in place across sectors most likely to come under further pressure.
As the collective focus shifts from firefighting towards recovery and dealing with the aftermath of the pandemic, trustees must strike the delicate balance between supporting their sponsor while seeking to address the increased needs of their scheme. Sponsors too will have to navigate protecting pensions interests and getting companies back on their feet and seeking new investment.
With this in mind, the proposed measures and powers for The Pensions Regulator in the new Pensions Bill (set to become law in the New Year) put new pressure on sponsors, with more stringent enforcement of fair treatment and acting in schemes’ best interests. While these measures are to be welcomed if they are deployed wisely, it is critical that regulatory action and enforcement does not impact or limit entrepreneurialism. Recovery efforts must be collective; sponsors, with the trustees and regulator behind them, must be given sufficient runway and headroom to get back on track.
At the same time, management must not lose sight of new guidance for journey planning: the quid pro-quo for schemes helping sponsors to get back to pre-COVID-19 life must be fair and equal distribution of future upside that can propel schemes towards a safer long-term outcome.
The rise of consolidators, capital-backed journey plans and other options designed to help members
get to full benefits or at least avoid entry into the PPF, is a reason for optimism and demonstrates the
increasing innovation coming into force across the UK pensions industry. Distressed sponsors are no
longer the worst-case scenario; today, there are far more options available if this scenario arises and
widespread collaboration can still help to secure pension promises.
So while some commentators have warned of a “tsunami” of insolvencies in 2021, we believe a long list of new schemes entering PPF assessment next year is avoidable if companies, trustees and other key stakeholders work collaboratively and creatively to ensure that both the employer survives and members’ benefits are secured.