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Assessing the value of pensions promises – parent company guarantees

The Pensions Regulator’s 27 March guidance emphasised the need for trustees of defined benefit pension schemes to engage with their sponsoring employers to understand the implications of the COVID-19/Coronavirus pandemic for their scheme’s employer covenant. Where employers seek reduced or suspended contributions, although the focus will naturally be on the scheme’s direct participating employers and ensuring there is no leakage in terms of dividend payments or other outflow, trustees should not neglect any parent company guarantors in their assessment of the covenant.

Guarantors represent an important backstop in the event that the participating employers are unable to meet their obligations to the scheme. It is important that trustees understand and monitor the guarantor’s financial strength – after all, a guarantee only has value if the guarantor can actually provide the promised support. This monitoring can be an additional challenge where the guarantor is an overseas entity.

Parent company guarantees are a popular way of adding support to defined benefit schemes. Where such a guarantee is in place, trustees should address a number of questions, including:

  1. How is the Coronavirus pandemic affecting the guarantor’s business? If the scheme had to claim under the guarantee, would the guarantor be able to pay?

  2. Has the guarantor made continuing representations to the trustees about its financial strength and/or compliance with its banking facilities? If so, have the trustees reminded the guarantor of this obligation? (This could be a useful way of prompting a discussion with a remote parent company guarantor about its financial position.)

  3. Has the guarantor committed not to prejudice the position of the trustees compared to other creditors without trustee consent (often called a “negative pledge”)? If so, have the trustees checked whether the guarantor’s response to the Coronavirus pandemic might include new or extended secured lending, the sale of significant assets or similar?

Checking the terms of parent company guarantees and taking legal and/or covenant advice on appropriate next steps to be sure the guarantee can be relied upon would be sensible precautions in these uncertain times.

© Copyright 2020 Squire Patton Boggs (US) LLP

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About this Author

Clifford Sims, Squire Patton Boggs, Pension Fund Investment Lawyer, UK
Partner

Clifford is a partner in our London office and heads our Pension Fund Investment Group. He is recognised by Chambers UK as a leading individual for pensions and “an expert in investment and financial services in relation to occupational pensions” who is "extremely well organised, very commercial" and “is someone who is able to combine good technical knowledge with communications skills”.

The Legal 500 UK commented he is “more commercial than the average pensions lawyer” and “deeply knowledgeable”. He advises trustees, local authorities, product...

44 20 7655 1193
Caroline Noblet, Squire patton Boggs, employment matter lawyer, multijurisdictional litigation attorney, London
Partner

Caroline Noblet co-leads our Labor & Employment Practice Group and is based in our London office. Caroline has approximately 25 years of experience as an employment lawyer, advising a broad range of businesses including FTSE 100 and 250 companies. She is responsible for some of the firm’s key global accounts, as she co-ordinates and advises in relation to all matters of employment law, on multijurisdictional and local issues. She is passionate about the benefit a “one-stop” shop service can bring to clients, in terms of the effective and efficiency of legal services delivery.

44 20 7655 1473