The Pension Protection Fund (PPF) should focus more on the long-term survivability of scheme sponsors, according to a growing portion of pension and restructuring lawyers.
According to a PwC survey, in company voluntary arrangement (CVA) processes, where the PPF exercises a pension scheme's vote, the compensation scheme should be seeking to ensure the plan is viable over the longer-term.
This was the view expressed by 35% of lawyers attending its Pensions and Restructuring Lawyers Event in May, up from 19% in 2019. The largest proportion (46%) said the PPF should ensure the pension scheme was treated equitably, although this had fallen from 53% in 2019.
Speaking to Professional Pensions, PwC employer covenant and restructuring practice leader Jonathon Land said the PPF's approach to these situations was more important than ever as their usage grows in popularity, and may continue to do so as government Covid-19 support unwinds.
"The economy is going well and there is a lot of deals activity," he said, "but there's also a lot of furlough money and there will be a fragmenting of the economy in the autumn where some businesses will do really well and some will struggle.
"It wouldn't be surprising if some of the latter would be more legacy businesses with large pension obligations, and then the question becomes ‘what happens in that restructuring?'. The CVA is quite a common choice now, particularly if you have a significant property base."
CVAs have been used by ailing retailers in recent years, including Arcadia, Debenhams, and Mothercare. However, each of these three businesses later became insolvent.
There will be a "real focus" on whether the company's proposed plan will work, while also ensuring any pension scheme is not unfairly disadvantaged.
"The best support for the pension scheme is an employer that survives in the long-term."
While the aviation and travel sectors have been hit hard by the pandemic, they are likely to bounce back upon the end of social distancing, he said. Other retail and shop-based businesses may continue to face pressures.
Economic distress
The finding came alongside a mixed economic outlook from the survey participants, with a 2.4% growth rate for the UK economy predicted over the next five years and half expecting growth will be in line with the top five EU countries.
Yet, at the same time, 46% also felt at least £27bn, or 36%, of government Covid-19 business interruption loans would be written off. Around one in five respondents (18%) felt that the total government debt written off would be 50% or higher.
Consequently, perhaps, 60% of lawyers expected a rise in the number of so-called PPF+ deals in the next three years. These are bulk annuity transactions where benefits are insured above PPF compensation levels, but below the full buyout level.
The economic distress caused by the pandemic may see some businesses go under while their pension schemes remain fairly well-funded.
"These are quite tricky deals to do but it is a way of banking a level of protection of the scheme and insuring the overhang," Land said.
The survey also found a rising interest in the impact of ESG on covenant concerns, while more lawyers were recommending clearance applications for M&A activity amid uncertainty over regulatory powers.
