Ahead of this week’s monthly announcement by the Bank of England on UK interest rates, LCP is urging trustees to make sure that they have a solid understanding of how their sponsor’s business drivers, cost bases, and debt structures could be impacted in the current high-rate environment. 

With interest rates at record highs and the prospect of them persisting for a while, trustees need to understand their sponsor’s business drivers and have full transparency of financial information. 

Trustees need to have a thorough understanding of the underlying debt structure of the sponsor. There are three critical matters to understand:  

• The terms of the borrowing and cash flow impacts of changes to rates will help the trustees understand any upcoming liquidity pinch points.  
• Whether increased interest rates or trading pressures could put banking covenants under pressure, which could give more control to lenders at the expense of other creditors.
• Know when the sponsor next needs to refinance. This could be on notably more adverse terms because of the cost of debt, more restrictive banking covenants and/or the need for security to be provided.  

Jonathan Wolff, Head of Covenant & Financial Analysis at LCP, commented: “Preparation is key during times of economic uncertainty. Trustees will have a more thorough understanding of the support behind their scheme if they have a strong relationship with the sponsor. In our experience, information-sharing protocols with employers, such as formally documented checklists around what information will be provided to trustees and when, are a really important part of any scheme’s governance toolkit.    

“By taking a collaborative and proactive approach, both trustees and sponsors can work together to face the high-interest rate environment with confidence and protect pension schemes.”

You can read more in this blog here.