• Refinancing in the current economic climate – Pensions Regulator sets out its expectations
• State Pension Age changes – Ombudsman moves closer to remedy for 1950s born women
• Double digit inflation arrives

Refinancing in the current economic climate – Pensions Regulator sets out its expectations

In what appears to be new regulatory guidance for trustees and sponsoring employers of DB schemes, but set out in an informal blog, David Fairs, Executive Director of Regulatory Policy, Analysis and Advice at the Pensions Regulator, has laid out in some detail what the Regulator expects to see when employers refinance their debt obligations, given the potential for an adverse impact on the employer covenant.

David lists six potential areas of financing debt obligations, setting out for each what trustees need to consider where changes are proposed.  The areas considered are interest costs and fees, debt structure, security/guarantees, financial covenants, restrictive covenants and counterparties.  As he makes clear, although none of these are new areas for trustees and employers to consider, “a challenging and inflationary financial climate makes changes in these areas potentially more likely”.  The current climate may also lead to more stringent conditions and costly terms.  Additionally, there may be new risks to consider in relation to alternative lenders.

The blog makes clear that the Regulator expects sponsoring employers and trustees to understand the implications of any refinancing on the pension scheme and the employer covenant, and to mitigate – to the extent possible – any detriment caused.  In this regard:

• Trustees should engage well ahead of any potential refinancing to ensure they have a strong understanding of the employer’s current debt structure and also consider debt covenants and refinancing within their monitoring, information sharing and contingency planning frameworks
• Employers should provide meaningful and timely information on debt and refinancing proposals to trustees. In addition to legal documents regarding the proposed refinancing, this could include forecasts, scenario analysis and other information provided to the lender as part of the process, that trustees may find helpful as part of their analysis and monitoring

The blog concludes by pointing to the Regulator’s guidance on corporate transactions and clearance, re-iterating the message that “it is critical that trustees and sponsoring employers engage effectively to assess the extent to which a corporate event is detrimental to covenant and agree adequate mitigation”.

Comment

Although it might seem that there is nothing new here – the Regulator has long asked trustees of DB schemes to monitor the employer covenant and to be on guard for potential adverse impacts – the Regulator’s focus has in the past seemed to be on corporate transactions rather than ‘business as usual’ refinancing arrangements.

As such, the Regulator’s call for trustees to look more critically at any potential refinancing, and (although not explicitly mentioned in the blog) get covenant advice if necessary on the detail of the refinancing before it happens and seek mitigation if appropriate, reflects the reality that many employers will be refinancing on less favourable terms than their current debt and some may find it difficult to refinance at all.  In this challenging economic climate, it is more important than ever that trustees regularly monitor their employer covenant and have good information sharing practices in place to ensure they have enough to pick up on any events that could adversely impact the covenant.

This blog also provides further evidence of the increased inquisitiveness and steadily increasing expectations that we are seeing from the Regulator at the moment on factoring pension scheme considerations into business-as-usual activity.

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State Pension Age changes – Ombudsman moves closer to remedy for 1950s born women

The Parliamentary and Health Services Ombudsman, in his latest report on the investigation he is carrying out into the way in which the DWP communicated changes to women’s State Pension Age and related issues, has now shared his provisional views for the second stage of his investigation with complainants, their MPs, the DWP and the Independent Case Examiners for further comment.  This follows the completion of the first stage on which he reported in July 2021 (see Pensions Bulletin 2021/30).

The Ombudsman says that his office is beginning to consider what action DWP should take to remedy the apparent injustice, will share provisional views once any further evidence received from the above parties has been considered and will then go on to publish findings and the remedy at the same time.  No timescale for this has been published.

Comment

It now appears that the Ombudsman may recommend some form of financial remedy, but only in relation to the maladministration that arose as a result of poor communication by DWP of the changes from 2005 onwards.  For the avoidance of doubt the Ombudsman re-iterates that he cannot order the reinstatement of the State Pension ‘lost’ as a result of the increase in State Pension Age.

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Double digit inflation arrives

The publication on 17 August of the inflation figures for July makes for depressing reading with the annual increase in the Consumer Prices Index rising from 9.4% in June to 10.1%.  The annual increase in July last year was just 2.0%.  The annual increase in the Retail Prices Index now stands at 12.3%, compared to 3.8% in July last year.  The CPI including owner occupiers’ housing costs (CPIH) rises to 8.8%.

Comment

Although we need to wait until mid-October for the September inflation figures to be published the stage now seems to be set for an increase in the State Pension next April at a level not seen since 1991 – that fully protects pensioners from inflation, as measured by the CPI at least.

For many DB occupational pension schemes, pension increases, which in a low inflationary environment have kept pace broadly with price inflation, will be severely capped.  This may result in calls for discretionary increases to be considered, especially in the light of improved funding of such schemes.  Other actions, including reviews of member option terms, hedging approaches and perhaps member communications, are also likely to be high on trustees’ agendas.

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