You are no doubt aware of the recent rapid collapse of Silicon Valley Bank (SVB) in the US and the emergency purchase of its UK subsidiary by HSBC.

There are specific reasons behind its failure and its client base was mainly tech-focused start-ups so it probably won’t impact many, if any, UK sponsors of defined benefit (DB) Schemes. However, it serves as a timely reminder that the impact of the rapid rise in interest rates globally has not yet been fully appreciated.

Base rates in the UK have shot-up from 0.1% to 4% in 15 months and from close to 0 to 4.5% in the US in even less time. In this case that lead to a dramatic impact on SVB which had used monies held on deposit to invest in “ultra-safe” US gilts as there were little other options for getting a return on that money.

A perfect storm of assets purchased a short time ago quickly declining in value as the US Treasury issued new debt at a higher yield, combined with deposits being withdrawn to fund businesses experiencing cash-flow constraints, ultimately led to the run on the bank.

Although this may not be repeated in well capitalised and diversified banks in the UK, the key takeaway is that there is significant debt sitting on the balance sheet of many UK companies which will be due for refinancing in the next few years at significantly higher rates then when it was first issued, and in an environment when costs have grown materially due to double digit inflation.

Inflation pressure may now be easing but the costs of supplies, energy and labour are unlikely to return to the levels they were two years ago and companies will be experiencing cash-flow pressure where they can’t pass all of that cost on to customers.

This event is therefore a good reminder for trustees that they need to have up to date information on the levels of debt of the scheme employers; the counter-parties of that debt; and the timing of any refinancing so that they can understand and prepare for the impact of any shocks and cash-flow issues that might be coming down the line.

Overall, DB Schemes have seen the benefit of rising gilt yields through improved funding and, for many, “buy-out” is now in touching distance. However on the flip side, employee covenants are coming under increasing pressure and so trustees need to remain vigilant and make sure their journey plans stay on course.