The Global Financial Crisis: Some Issues For Pension Schemes


Originally Published In October 2008

The financial crisis has created risks and uncertainty

throughout the economy. Some effects on pension schemes are clear -

for example, the substantial fall in equity prices. Other

consequences may be far more difficult to assess.

This Special Edition attempts to identify, from a legal

perspective, some of the issues which employers and trustees of

defined benefit plans are likely to have to consider. Many of those

issues may appear obvious. Indeed, the review of such issues should

properly form part of the ongoing governance of any plan. However,

recent developments mean that employers and trustees will no doubt

wish to take stock of the position from their respective


The importance of cooperation and the sharing of information

between employers and trustees is stressed throughout this Special

Update. Responsibility for the delivery of pension benefits should

best be seen as a partnership between the employer and the

trustees. This is particularly critical in the current troubled

economic times, when circumstances may change with alarming


We begin by identifying some of the issues from the perspective

of the trustees. This is, of course, relevant not only to trustees

themselves but also to employers who will want to attempt to

anticipate and address the trustees' likely concerns. In

addition, understanding the respective powers of the trustees and

the employer is important in framing discussions.

The trustees' perspective

The trustees' prime concerns will be:

how has the crisis affected the employer?

how has the crisis affected the fund?

are the plan's investment arrangements robust?

Reviewing the employer's covenant

Trustees need to monitor the continuing strength of the employer

covenant (that is, the employer's ability to continue to fund

the plan). They need to bear in mind that, while the financial

strength of the corporate group is material, it is normally only

those employers within the group whose employees participate in the

plan which have a direct obligation to contribute to the plan.

Trustees should revisit past analysis of the employer covenant.

What information was obtained in the most recent actuarial

valuation process? What conclusions were reached? Are they still

valid? Is there any aspect of the employer's financing

arrangements which could give rise to concern?

If the valuation showed a deficit, over what period is the

employer making it good (the recovery period in the valuation)? Is

this now realistic?

Is the employer's covenant supported by any collateral, such

as fixed or floating charges, parent company guarantees or bank

letters of credit? Has the strength or value of that collateral

either diminished or become more difficult to realise? Should

additional or alternative collateral be sought?

Alternatively, has any change in an...

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