1. How are trustees reacting to the recent announce-ments from the regulator on recovery periods?

2. Are you seeing employers and trustees agree to longer recovery plans?

3. Are you seeing increasing demand for covenant assessment?

4. Are you seeing increased use of contingent assets?

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Christopher Clayton - Managing director, Close Brothers

1. Some trustees see this as an invitation to employers to extend the recovery period, but there is also recognition that the regulator is prepared to be flexible in difficult economic times, a view supported by most trustees. The last thing they want to do is prejudice the viability of their employer.

2. Most employers and trustees are still trying to get within the regulator’s 10-year trigger, but the boundaries are being pushed by some employers who are trying for 12 or 15 years. The more immediate concern is the affordability over the first three years of the recovery plan so we are seeing more back-end loading rather than increasing the length.

3. Some trustees and employers have been sceptical about the value of employer covenant reviews and they are right if the review only tells them what they know already. We are seeing a greater demand from trustees for in-depth reviews, which give the trustees better insight into the finances of their employer and its trading prospects over the next three years.

4. Giving security over assets rather than putting cash into the scheme can be a good option, but employers that are facing difficult trading conditions are holding onto assets in case they need to use them for bank financing or to gain liquidity.

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Andrew Conquest (pic) and Paul Cook - Partners, Grant Thornton

1. Some trustees are concerned that employers may be taking advantage of this statement to propose extending recovery plans when affordability may not be the real issue. There remains a need for open and frank discussions about affordability; some negotiations are taking a long time to resolve with the trustees having limited information to support the employer’s stance.

2. There has been a definite trend of employers seeking to negotiate extended recovery periods. This is a dilemma for the trustees. It ought to be tempered wherever possible with the ability to secure contingent asset funding in support. This can pose real problems for the employer.

3. In the second round of scheme funding trustees have taken note of regulatory guidance to ensure the covenant is factored into the funding process. We are also seeing assessments being used in refinancing – a key feature of the current climate – where lenders are looking to replace unsecured funding with secured debt.

4. A number of employers have resisted such demands as they cause too much restriction. But we have also seen imaginative use of assets to support a deficit as an alternative to letters of credit, which are proving expensive in the current environment and restrict funding lines.

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Darren Redmayne - Managing director, Lincoln International

1. The regulator’s [February] announcement was timely. While many are still digesting its content, early evidence is that trustees are increasingly listening to sponsors’ requests for additional latitude or longer recovery plans.
 
2. Absolutely. We are now regularly seeing 15, 20 and 25 year-plus recovery plans. The triple whammy of employer covenant weakening, substantial asset deterioration and increased liabilities has to be reconciled with relatively fixed levels of near-term sponsor affordability – leading to longer plans.

3. Yes. Since the last valuation cycle where trustees often felt comfortable assessing employer covenant without external help, the following has happened: 1) the added value of having independent advice is better understood; 2) having seen household names collapse, trustees have become increasingly concerned as to the strength of their employer; and 3) substantial deficits have re-emerged that need funding and require independent analysis of affordability.

4. Increased use of contingent assets is inevitable and important. With sizeable deficits and multiple competing demands for cash, contingent assets are an important bridging tool. They can provide trustees with security and the sponsor with breathing space.

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Jonathon Land - Principal, PricewaterhouseCoopers

1. Opinion is divided, with some trustees agreeing with the approach while others say it is unhelpful and conflicts with earlier messages.
The general consensus is this guidance is all very well, but that the two key issues are how much cash is going to be paid into the scheme over the next three years, and is there a contingent asset that can help if the company starts to struggle?
 
2. Trustees want to optimise their scheme’s position but are clearly not looking to bankrupt the employer. If, after reviewing the affordability position of the company, the view is no more cash is available, then trustees are agreeing to longer recovery periods in return for other sponsor support.

3. There has been a steady increase in demand over the last five years with sharp growth recently as a result of the economic downturn.
Interestingly, companies are also increasingly asking for their own assessment of the covenant to share with the trustees – particularly in distressed restructuring cases.
 
4. Our latest pensions survey found 30% of companies intend to increase their use of contingent assets. This increases to 38% for FTSE 100 companies and 50% for companies where the pension scheme is of comparable or larger size relative to the company. However, our experience is it is not always easy to agree on the size or type of contingent asset.