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...