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Corporate Insolvency and Governance Act 2020

- United Kingdom
- Pensions
12-08-2020
The Corporate Insolvency and Governance Act 2020 has been heralded by many as the most significant insolvency reform for a generation. It introduces new restructuring tools – the moratorium and the restructuring plan – which have far reaching, in some cases negative, consequences for defined benefit (DB) pension schemes.
This briefing looks at what steps DB trustees can take now to assess and help protect their position in light of these changes.
What are the new tools? A quick recap
The restructuring plan: a tool (with court involvement) that’s largely based on an existing restructuring tool, the scheme of arrangement, but with some notable differences. It allows a company to agree a compromise with its creditors and the court can bind creditors even if they don’t vote in favour, so long as certain tests are met.
The moratorium: during which companies only have to pay certain creditors. A moratorium could potentially last for a year with creditor agreement and even longer with court approval. Certain pension debts such as deficit reduction contributions and scheme expenses due from the employer are probably not payable. The trustees may also be left with fewer options to recover debts to the scheme and to enforce security. Meanwhile, debt payments which aren’t subject to the payment holiday effectively get ‘super priority’ on any company insolvency within 12 weeks after the moratorium.
Neither restructuring tool will, by itself, trigger a Pension Protection Fund (PPF) assessment period or a ‘section 75’ debt, unlike a company voluntary arrangement or entry into administration. So, accrual of benefits, if any, will not cease and no buy-out basis debt will become due to the trustees.
There is more information on these new tools in our speedbrief.
What actions could DB trustees take to protect their position?
Action | What does it involve? | When? | |
---|---|---|---|
1 | Monitoring / information sharing | Consider revising risk registers and information sharing agreements in light of the Act. In particular:
|
Now |
2 | Covenant monitoring and contingency planning for employer financial difficulties | Some considerations are:
|
Now |
3 | Factor into discussions on contribution changes or deferrals | Many employers are requesting contribution changes in light of COVID-19. These include payment deferrals, ‘back end loading’ of recovery plans and replacing contributions with contingent assets.
The new restructuring tools need to be factored into trustee considerations in relation to these types of requested changes. See also information below on contingent assets. |
When considering contribution changes or deferrals (e.g. on a valuation or COVID-19 related changes) |
4 | Contingent assets | Check how contingent assets work on a moratorium, for example:
Consider the type of security the scheme has:
|
Now, or whenever considering contingent asset value (e.g. valuation, ongoing covenant monitoring, contingency planning) or putting in place a new contingent asset |
5 | Funding and covenant | The possibility of the company using one of the new restructuring tools (possibly against the trustees’ or PPF’s wishes) should be factored into covenant and funding discussions. | Valuations or any covenant discussions (including on transactions) |
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.
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