1. THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions http://www.spc.uk.com Dealing with the Downturn: Issues for Employers and Trustees SPC/APL JOINT EVENING MEETING JANUARY 26 TH 2010 Peter Esam Jason Coates Association of Pension Lawyers

2. www.spc.uk.com THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions Introductions and Overview Speakers Introduction Overview of Session

3. Employer covenant in the downturn Why does it matter? Assurance that employer will be able to pay allows greater risk -investment strategy -lower technical provisions -or longer recovery plan

4. Relevance of downturn Deteriorating funding situation likely Even stronger employers struggle with size of deficits And they want to conserve cash Heightened risk of employer failure

6. Funding on technical provisions basis Provides cash flow Does not fully protect against increased insolvency risk But allows some risk management -review prudence Higher funding level means less abatement on insolvency

7. Assessing employer covenant against employer risk of insolvency Unlikely to get very helpful guidance on extent of recovery -Would need to know cause of insolvency – economic collapse, market collapse, unique event affecting this company, etc. More realistic to seek to assess risk of insolvency happening at all -Will this be the last company to go in this sector or the first? -Is the sector strong?

8. Understand the employer obligation In insolvency scenario primarily interested in section 75 Understand which employer would pay what "Last man standing" concept unhelpful here -Captures idea of scheme where liabilities are carried forward in the general pool after one employer insolvency -But liabilities often do not fall on last man -Regulation 9 Employer Debt regs Unless there are cross guarantees – there is no joint and several liability

10. When does the group covenant matter? – tprs view Employers alone cannot support scheme Changes are affecting wider group Employers have indicated group covenant relevant Existing support – e.g. parent co guarantee Interdependency between group and employer

11. P S Scheme EXEX Strong parent

12. PXPX SXSX Scheme E Strong employer – weak parent

13. PXPX SXSX Scheme E Strong employer – weak parent Intercompany debt Bank Guarantee/Security

14. Why might group covenant matter? Additional support from wider group AND/OR Risk of employer being dragged down by rest of group

15. Is tpr power to issue FSDs relevant? Not very Triggers may be difficult to satisfy – service company, insufficiently resourced Reasonableness test – tpr likely to start with s 43(7) factors including -Benefit received from employer -Connection with the scheme Even if trustees believe threshold crossed, will tpr agree? It's discretionary If there's a strong case for a FSD why not ask tpr to issue one and see what happens?

16. tpr guidance on guarantees The trustees should normally only allow a company guarantee as part of the scheme's funding strategy for relatively short periods (eg for three years or less) even though the guarantee may have been offered for a longer period. The reasons for this are: the value of a company guarantee can reduce significantly even over relatively short periods; and the triennial valuation process provides a natural point for the trustees to reconsider the role of the group company guarantee in a scheme's funding strategy. Given this, a company guarantee would not normally be suitable to support an extended recovery plan but could be used to support a back- end loaded recovery plan.

17. The role of contingent assets Tpr official position not entirely logical -parent company guarantee allows trustees to take account of parent covenant Trustees may be better off giving something on funding and getting contingent asset or long-term guarantee A guarantee -protects commitment of parent to scheme -allows recovery vs guarantor in insolvency situation -does not give direct power to trustees to get cash into scheme from weak employer Similarly other contingent assets allow covenant to be assessed as stronger

18. Should trustees act more like banks? When dealing with corporates, banks generally Collect other peoples money and give it to company Can choose their counter-party carefully Aim to recover a qualifiable debt in full Vary terms according to quality of counter-party Maximise their chances of full recovery by making loan conditional -Security, guarantees, etc.

19. Trustees negotiating position - funding Technical provisions -Assumptions must be chosen prudently Recovery plan -must be agreed (most schemes) Dont agree and wait for the cavalry? -how will tpr exercise powers? -the clock runs Difference acknowledged by tpr guidance on downturn Partly explains why higher insolvency risk does not lead to more prudent investment

20. Trustees negotiating position – restructuring Downside of insolvency for Bank Bank may benefit from deal with trustees -so may give at least share of up-side

21. Is the PPF relevant? Yes Members would prefer to be with insurer -No power to abate -Less funding risk -Transfers Hope does not mean this is wrong

22. www.spc.uk.com THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions Funding – The Employers View Overview – a continuing sponsor… TPR and the courts Cash is king Revising schedule of contributions Use of contingent assets Managing liabilities Compromise agreements

23. www.spc.uk.com THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions Cash is king

24. www.spc.uk.com THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions Cash is king Key business objective TPR statements: reasonable affordability a continuing sponsor TPRs position and politics Develop the business case Sharing upside later

25. www.spc.uk.com THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions Revising Schedules of Contributions Current SoC unaffordable Can SoC be undone and re-written? Issues to consider

26. www.spc.uk.com THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions Contingent asset solutions Way of reducing immediate cash call Types Creative solutions –Property –IP –Securitisation of income streams Issues to consider

27. www.spc.uk.com THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions Future service change Reminders from IMG

28. www.spc.uk.com THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions Taking the PPF into account Can it be appropriate to take the PPF into account? Yes – its a mater of purpose and degree Investment strategy Wind up powers

29. www.spc.uk.com THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions Managing Liabilities Enhanced Transfer Value exercises Pension increase exchanges Compromises

30. www.spc.uk.com THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions Enhanced TVs / Pension increase swaps Change of tune from TPR? Employers reaction Key issues: –Informed consent –S67 vs s91 and IMG case –Financial advice

31. www.spc.uk.com THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions Compromise Agreements Revisit Bradstock at PPF plus level Japan Airlines? Revise the law? Clearance and the TPR view

32. www.spc.uk.com THE SOCIETY OF PENSION CONSULTANTS The representative body for pensions Investment Link funding and investment More control for Employer Investment Sub-committees Contingent assets –Link to investment strategy / swap style –Is it legal?

33. Trustees response Employer involvement in investment -Decision-making -Conditionality Cash is king – always?