UK - Scheme trustees must ensure their scheme does not slip down the priority order of creditors after company debt repayments doubled year on year, consultants warn.
LCP's covenant outlook report revealed the last two years have seen significant repayments of debt by FTSE250 companies and a smaller increase in pension contributions.
However, it warned cash-generating companies might look to reward shareholders through increased dividends or share buy-backs, or make acquisitions, whereas defined benefit scheme trustees may expect a proportion of any available cash to be paid to the scheme.
It said trustees and sponsoring companies should be aware of how cash allocation affects the pension covenant and look carefully at whether further debt repayments strengthen the covenant or not.
LCP's data - based on companies sponsoring a defined benefit pension scheme in the FTSE250 - showed debt repayment shot up from £3.8bn ($6bn) in 2009 to £7.8bn last year - an average repayment of £55m per company.
Companies in fact made greater pension contributions than in the previous year, but the £2.1bn paid out in contributions was dwarfed by the £4.3bn interest and £4.1bn dividend payments for the same period, the firm said.
LCP partner James Atherton said: "Our analysis has shown that it is the volatility associated with defined benefit pension schemes that creates a problem for companies. Many companies now have an opportunity to take advantage of their reduced indebtedness to address legacy pension issues."
This comes as Punter Southall Transaction Services said the amount of debt that will be refinanced in the next few years is expected to reach unprecedented highs due in part to the high level of transactions activity between 2005 and 2007 which saw a surge in highly leveraged, low interest deals.
It also urged scheme trustees and sponsors to fully understand the implications of refinancing on the employer covenant supporting the pension scheme to prevent the covenant becoming weaker, including the scheme unintentionally slipping down the priority order of creditors.
Punter Southall Transaction Services head of covenant consulting Lorant Porkolab (pictured) said: "Refinancing is now a regular feature of most businesses but it is important to make sure that the pension scheme does not get overlooked in this process. The trustees, in their position as a creditor of the business, may wish and need to take a seat at the negotiating table.
"However, trustees should not rush into seeking such a position without fully understanding the existing covenant position, the expected impact of the refinancing and its materiality, as well as their powers bestowed on them by the pension scheme's trust deed and rules."
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