Consultation Response #5: Feeling Stressed?

COVID-19 has been putting pressure on our everyday lives, the economy – and it is no exception for DB schemes and their sponsors.

The focus of TPR’s new code of funding consultation on stressed schemes could not have come at a better time. It is, however, important to make the distinction between those schemes that are facing some difficult, albeit manageable, issues (‘stressed schemes’) and those where things are close to reaching a tipping point (‘distressed schemes’).

Stressed schemes are those which cannot meet the Fast Track requirements, but are still viable with some “flex”. But conflicting stakeholder perspectives can make the question of how to flex a difficult one. For example, a longer recovery plan with lower contributions may mean that there is insufficient coverage of “PPF drift”, meaning that the PPF’s exposure would be expected to increase over time (noting one of TPR’s objectives is to protect the PPF). Alternatively, relying on investment returns to ensure a shorter recovery plan can square the circle on PPF drift, but there is increased reliance on the covenant to underwrite the associated investment risk, which may not be appropriate. Should the covenant fail, the PPF is exposed to pick up any shortfall.

Then there are also ‘distressed schemes’, where viability (in itself tricky to define) is less obvious and subject to many uncertainties – coaxing these distressed schemes through the Bespoke route may be more difficult. Crucially, intervention at the point of ‘inevitable insolvency’ is often too late, and earlier engagement could provide more options to rescue schemes & sponsors.

The new code of funding can help put the spotlight on stressed schemes sooner – at a point where it is still possible to secure covenant augmentations and help improve member outcomes. Further consultation between TPR, the PPF and the market would also be helpful to reconcile the different perspectives and set ground rules in these complex cases.

Flo Gracey, Analyst

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