What was the situation?

• Pension Scheme A was sponsored by a multinational infrastructure operator which owned valuable infrastructure assets and provided a Tending to Strong covenant to the Scheme
• At the most recent actuarial valuation, there was a material deficit on a long term funding target basis which was behind expectations at the time of the previous valuation
• In this context, the Trustees were seeking a higher level of contributions than was set out in the existing recovery plan
• However, the Sponsor was concerned about near term affordability in the context of heightened investment needs required to meet competitive challenges, as well as the potential risk of overfunding of the Scheme on a Technical Provisions funding basis

What were the key risks?

The Trustees were keen to ensure that:

• A recovery plan was agreed that would lead to the Scheme reaching its long term funding target basis within a reasonable timeframe
• Any security and protections agreed in the context of the funding solution were additive to the existing covenant; i.e. that there was no double counting of covenant support
• The trade off between the length of recovery plan and any security provided as part of the funding solution was reasonable in the context of overall level of funding, investment and covenant risks
• In downside scenarios, the asset would continue to provide appropriate collateral should it be required
• The Pension Regulator (“TPR”) would be satisfied that the arrangement met their criteria

The Sponsor was keen to ensure that:

• The profile of payments agreed would allow them to meet their investment and dividend requirements in the medium term
• Bondholders would not be disadvantaged to the extent that borrowing costs would increase / the Sponsor would struggle to raise capital if required
• The risk of overfunding the Scheme on a TPs basis would be mitigated

What action did we take and what were the benefits?

• Advising the Trustees, we determined the potential range of assets that would be appropriate to provide backing for an asset backed funding solution in conjunction with other Scheme and Company advisers
• We assessed the suitability of potential assets by considering elements such as the liquidity of the underlying asset, separability of the asset from the Sponsor and correlation of value to the performance of the Sponsor
• We worked with the Sponsor to determine that a business that had previously been acquired by the Sponsor would satisfy both parties’ requirements by providing material value to the Trustees and not impacting the Sponsor’s overall creditworthiness / operational flexibility
• We determined that the extended term of payments (over 10 years, which is longer than the average recovery plan of 7 years for schemes of equivalent covenant strength) was still satisfactory to the Trustees and TPR due to the scale of the security and the downside protections which were agreed
• We implemented a monitoring framework which allows the Trustees to continue to assess the value of the collateral and take action where required

What are the key takeaways?

• As schemes get closer to self sufficiency, innovative funding solutions become more relevant, particularly when Sponsors become concerned about overfunding on a Technical Provisions basis
• Trustees and Sponsors need to work together to determine the appropriate assets and consider unique structures taking account of the specific nature of the Sponsor. This includes an evaluation of the likely availability of the assets in the case of a default event (e.g. tangible v intangible assets) 
• Schemes need to make sure they are protected in different scenarios from an actuarial, investment, legal and covenant perspective

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