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Press release

Strong sponsor relationships vital for trustees in high-interest rate environment- LCP

Pensions & benefits DB corporate consulting Economy DB pensions Corporate strategy

Ahead of this week’s monthly announcement by the Bank of England on UK interest rates, LCP is urging trustees to make sure that they have a solid understanding of how their sponsor’s business drivers, cost bases, and debt structures could be impacted in the current high-rate environment.

With interest rates at record highs and the prospect of them persisting for a while, trustees need to understand their sponsor’s business drivers and have full transparency of financial information.

Trustees need to have a thorough understanding of the underlying debt structure of the sponsor. There are three critical matters to understand:

  • The terms of the borrowing and cash flow impacts of changes to rates will help the trustees understand any upcoming liquidity pinch points.
  • Whether increased interest rates or trading pressures could put banking covenants under pressure, which could give more control to lenders at the expense of other creditors.
  • Know when the sponsor next needs to refinance. This could be on notably more adverse terms because of the cost of debt, more restrictive banking covenants and/or the need for security to be provided.

Jonathan Wolff, Head of Covenant & Financial Analysis at LCP, commented: “Preparation is key during times of economic uncertainty. Trustees will have a more thorough understanding of the support behind their scheme if they have a strong relationship with the sponsor. In our experience, information-sharing protocols with employers, such as formally documented checklists around what information will be provided to trustees and when, are a really important part of any scheme’s governance toolkit.

“By taking a collaborative and proactive approach, both trustees and sponsors can work together to face the high-interest rate environment with confidence and protect pension schemes.”

You can read more in this blog here.

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