Case Study: Mitigation secured by a corporate sole trustee on change of control of the sponsoring employer

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Background

LawDeb acts as corporate sole trustee of this DB scheme having previously acted as co-trustee. The scheme has around £200m in assets and 600 members. The scheme’s sponsoring employer is a specialist insurance broker with operations in the UK and overseas. The sponsor has a strong and well-established market position, and the business has been profitable for many years. The scheme’s most recent actuarial valuation was carried out on the basis of a “tending-to-strong” covenant assessment and revealed a funding deficit of c.£16m.

Takeover of sponsoring employer

In 2021 the parent of the sponsoring employer decided to sell the business. The successful bidder was a 50:50 joint venture between a private equity firm and a sovereign wealth fund. The Trustee and its key advisers engaged with the sponsor, the purchaser and their advisers early in the process, carried out a comprehensive covenant impact assessment and maintained regular ongoing dialogue with all the key stakeholders. This facilitated timely and informed discussions with the sponsor and purchaser and led to a mutually acceptable solution being achieved.

Mitigation

Prior to the transaction the sponsoring employer was essentially debt free. The acquisition financing involved significant leverage and introduced higher ranking creditors. This meant that the employer covenant was weakened and mitigation would be required. This was clearly articulated to the sponsor, and discussions were progressed in a pragmatic and constructive manner.

Outcome

To reflect the weakening of the covenant, the Trustee reached agreement with the sponsor to move to a more prudent funding basis, targeting full funding on a low dependency basis by 2025, bringing forward the previous target by 7 years. The additional funding requirement was met by an up-front contribution with the balance being added to the existing recovery plan. These additional contributions were broadly commensurate with the estimated reduction in dividend which would be available to the scheme on an insolvency of the sponsor post the transaction. The Trustee also took this opportunity to put in place a more formal information sharing protocol and covenant monitoring framework.

In accordance with Law Debenture’s governance model, the full package of mitigations was reviewed and approved by a peer panel consisting of 4 Trustee Directors with diverse skillsets and backgrounds.

This good outcome for members was achieved through Law Debenture’s full corporate sole trustee offering of independent trustee, scheme secretariat, governance and pensions management, and working closely with Barnett Waddingham (actuary), Hogan Lovells (legal adviser) and LCP (covenant adviser).

As a corporate sole trustee we are generally able to react more quickly than a traditional trustee board and we were certainly helped by having a strong and responsive team of advisers on this transaction. The outcome has been positive for members as the security of members’ benefits has been protected through the process.

Daniel Barlow – Lead director, representing LawDeb as Corporate Sole Trustee

The interaction between funding and covenant is rarely straightforward in these circumstances, but we worked closely with the corporate sole trustee and their advisers to understand the issues and their objectives. This collaborative approach allowed us to put a range of clear, joined-up solutions to the employer and helped achieve an outcome that was acceptable to all parties.

Steve Hitchiner – Scheme Actuary, Barnett Waddingham

Having a sole professional trustee meant that negotiations around mitigation could take place in real time and agreement was reached quickly. The Scheme is now well funded which allows the Employer to concentrate of its business whilst leaving Law Deb as sole trustee to take care of the Scheme and its members.

Duncan Buchanan – Legal Adviser, Hogan Lovells

As is often the case, strong communication was important in quickly arriving at a fair outcome. Early discussions between the sole trustee and the seller highlighted the key factors in the transaction from a regulatory perspective. As a result of frequent touch points thereafter, there were no surprises for the trustee on the shape of the deal and there was nothing unexpected for the relevant stakeholders in the trustee’s requests for mitigation.

Jonathan Wolff – Covenant Adviser, Lane Clark & Peacock LLP