Trustees warned to assess impact of interest rate rises on strength of sponsoring employer

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Following interest rates hitting levels not seen since the end of 2008, Trustees should take the time to understand how a high interest rate environment could impact the ability of sponsoring employers to fund their DB pension scheme.

While rising long-term rates are generally good news for scheme funding levels, they will impact upon businesses differently depending on their debt structure and how exposed they are to interest rate fluctuations.

Any adverse impacts on covenant support available to the scheme could have significant consequences on an employer’s ability to provide financial support to its scheme. Any required changes in the security provided to lenders could also impact a pension scheme’s insolvency recovery.

LCP recommend that Trustees understand their sponsor’s financial position and structure, particularly in light of the Pensions Scheme Act 2021. The Pensions Regulator expects trustees to have full visibility of changes to the security of the pension scheme. Failure to do this can result in civil or financial penalties.

Fran Bailey, Partner at LCP, commented: “In this high interest rate environment trustees need to really understand the finances of the sponsoring employer.  Engagement is key to this. Processes should be in place to ensure that any changes in a sponsor’s financing profile are communicated in a timely manner, and that sufficient information is shared to allow the covenant impact of these to be assessed. This will help them to protect both the scheme and themselves.”