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Covenant Quarterly Q1 2022

PSA21 returns focus to understanding insolvency outcomes

Pension Schemes Act 2021 (PSA21) has returned insolvency analysis to the forefront of many trustee agendas.

The new Contribution Notice (CN) tests introduced by PSA21 formalise how pension trustees should think about corporate transactions in legislation. In particular, the Employer Insolvency Test considers an act or failure to act that “would have materially reduced the amount of the
section 75 debt likely to be recovered by the scheme”. This will involve quantifying the impact that corporate activity, such as debt refinancing, merger and acquisition activity, or internal reorganisation (such as tax restructuring) may have on the recovery made by a pension scheme in a downside scenario.

As a result, estimating the potential recovery to a pension scheme in the event its sponsor faces distress is now an essential tool in understanding a scheme’s position. Any reduction in the scheme’s assumed recovery could then be used to inform mitigation negotiations with the sponsor.

However, this can often be a complex and challenging process requiring numerous key assumptions and experience of how such a scenario could develop for a specific sponsor.

Recognising the importance of insolvency analysis, trustees will need to:

  1. Understand and monitor the scheme’s return in an insolvency scenario at regular intervals. This can help ensure that the trustee can react quickly to quantify the impact of corporate activity relative to the status quo position;
  2. Ensure that an appropriate governance framework is established to ensure the trustee is able to consider corporate activity in the context of the new regulatory environment in a timely manner; and
  3. Identify other strategic initiatives that insolvency analysis could support, including LTFT calibration, robust covenant monitoring and contingency planning.

PSA21 will help ensure trustees have a ‘seat at the table’ during corporate events, but it is now more essential that trustees are familiar with how to utilise insolvency analysis as a strategic and tactical decision-making tool.

Read the full Covenant Quarterly Q1 2022 which also includes the following articles:

  • Datawatch: Bank of England interest rates
  • Ask the Analyst: How can a business disposal impact the covenant
  • Regulatory developments: The authorisation of the first superfund

For more information contact Nick Agius, Director

Nick Agius


Nick Agius
Associate Director