Lifetime mortgages and BPA insurers – Argyll Insight

Lifetime mortgages are not something the pensions industry has needed to be particularly familiar with historically.  However the term is starting to find its way into the pensions vernacular due to the huge increase in risk transfer activity in the last couple of years and given all bulk purchase annuity insurers are invested in LTMs to some extent.

Argyll has produced an Insight paper on LTMs looking at what they are and why they matter for buy-ins and buyouts, and in particular what pension schemes need to do to manage any potential risk exposure.

There is also a summary article.  Both publications can be found below.

Summary article: House prices could put pressure on BPA insurer solvency levels (Sept 2023)

Insight paper: Lifetime mortgages – Chapter and Verse (Sept 2023)

For further information, contact:

Richard Hall
rhall@argyllcovenant.com
+44 (0)118 334 5801
+44 (0)7718 543168

2560 1707 Argyll Covenant
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Covenant assessments and monitoring

Understanding the ability of an employer to support its pension scheme is a central component of trustees’ risk management and has been a core theme of funding guidance published by the Pensions Regulator.

Argyll helps trustees understand the employer covenant.  The Regulator has made it clear that it expects trustees and employers to approach risk management in an integrated way and consider covenant, funding and investment risks together (Integrated Risk Management).

By working closely with their actuarial, legal and investment advisers, we ensure the covenant is integrated into trustees’ funding and investment decisions, as expected by the Regulator.  We also support trustees when the covenant changes, usually as a result of corporate activity such as a merger or acquisition, debt refinancing or business restructuring.

Although a full covenant assessment is usually carried out every three years to coincide with the actuarial valuation, the Regulator expects trustees to monitor the covenant between valuations.  We offer a variety of monitoring solutions from ‘light touch’ KPI monitoring to detailed dashboards and commentary.

We tailor our service to each client which can range from regular covenant assessments to large transaction- or funding-based projects.

We have experience of a vast range of industries and are also a leading provider of covenant analysis to the non-profit and charitable sector.

Contact us for more details of our services or for a no-obligation, confidential discussion of your requirements.

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Funding negotiations

At every actuarial valuation trustees and employers need to agree an appropriate level of funding to remove any funding shortfalls or to target self-sufficiency or buyout.

We can help trustees understand the level of contribution it would be reasonable to request from the employer taking into account cash generated by the employer and other calls on cash.

We can also take an active role in negotiations, advising trustees on strategy and helping secure appropriate funding for the scheme, as required.

For funding discussions we can consider the availability of non-cash security measures such as guarantees, asset-backed structures and charges over assets (contingent assets).

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Corporate transactions

A corporate transaction can have a material impact on the employer covenant.  Trustees will want to ensure that the scheme is not disadvantaged by such activity where it could result in the employer being less able to support the scheme.

Examples of corporate transactions are:

  • Sales and acquisitions of companies and assets
  • Debt refinancings
  • Corporate restructurings
  • Dividend payments
  • Share buy-backs

We have been involved in a large number of corporate transactions including many high profile situations.  We use our considerable corporate finance and restructuring expertise to advise trustees on the impact of transactions and to propose appropriate mitigation, where applicable.  We can also assist trustees in their mitigation discussions with employers and in liaising with the Pensions Regulator.

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Creative funding solutions and use of contingent assets

Contingent assets provide additional funding support for a pension scheme in certain circumstances.  For example, a guarantee could strengthen the covenant as the guarantor would meet the pension obligations of an employer in the event the employer were not able to meet them itself.  A charge over assets would entitle the scheme to an asset in the event the employer became insolvent.

Contingent assets can provide non-cash (when put in place) alternatives to pension contributions and strengthen the covenant.

We are used to considering the availability of contingent assets for trustees and helping trustees secure these as part of their funding discussions with employers or as mitigation for corporate transactions.

We think creatively and have experience of a wide range of measures that can be used to identify additional security for members’ benefits.

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Insolvency analysis and outcome statements

Consideration of a scheme’s potential recovery on insolvency is an important aspect of covenant analysis.  Even when the likelihood of insolvency is remote, it is important for, and TPR will expect, trustees to understand the scheme’s priority relative to other creditors in a worst case scenario, and the impact of corporate events on any recovery.

We have considerable insolvency and restructuring expertise in-house which enables us to advise on insolvency outcomes.  We can construct relatively simple analyses to very complex models, from Estimated Outcome Statements to large group models known as Entity Priority Models (EPMs).

We can advise trustees on the potential impact of transactions on the covenant.

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Investigations into the availability of TPR’s moral hazard powers

The Pensions Regulator has wide-ranging powers to prevent employers from avoiding their funding obligations, called moral hazard (or anti-avoidance) powers.  In particular, Contribution Notices allow TPR to require companies and directors to pay monetary amounts to pension schemes, and Financial Support Directions allow TPR to require appropriate financial support is put in place for a pension scheme.  Further The Pension Schemes Act 2021 introduced criminal sanctions for individuals involved in activity that weakens a pension scheme’s security.

We have a detailed understanding of the eligibility criteria for TPR’s moral hazard powers.  We can prepare eligibility assessments to assist trustees in seeking the Regulator’s help to remedy unmitigated detriment caused by corporate events or under-resourced schemes.

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Affordability analysis

Trustees and employers must agree a Schedule of Contributions at each three yearly actuarial valuation.  Trustees can find it difficult to know how much it would be reasonable requesting from their employers by way of contributions.

TPR expects pension schemes to be treated equitably with other stakeholders, usually shareholders and lenders.  TPR also recognizes that some cash might be used by the employer as an investment to grow the business and potentially improve the covenant (sustainable growth), which could be in the interests of the pension scheme.

We can assess the cash generation of employers together with the other calls on the employers’ cash, including the need to invest for sustainable growth.  We can then recommend a level of contribution that would be reasonable and equitable for the trustees to request to support the trustees’ funding discussions.

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Asset backed contribution stressed insolvency valuations

Asset-backed contribution structures (ABCs) are a form of contingent asset where a pension scheme is provided with a share in a corporate structure that contains an asset.  The structure pays an income stream to the pension scheme and the asset acts as security in case the structure is no longer able to pay that income.

Trustees need to value the ABC structure to allow it to be taken into account in actuarial valuations and annual funding updates.  The Pension Protection Fund also allows ABCs to be taken into account for PPF levy purposes provided the structure has been appropriately valued.

The structure of ABCs can be somewhat complex and they often require expert help to value.  We have experience of a number of ABC structures containing a variety of assets.  Our in-house insolvency expertise allows us to value these for trustees on the basis specified by the PPF, which could result in a lower PPF levy.

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Guarantee testing for PPF levy

Guarantees are a form of contingent asset that provide additional funding support for a pension scheme in certain circumstances.  A guarantee could strengthen the covenant as the guarantor would meet the pension obligations of an employer in the event the employer were not able to meet them.

Also the Pension Protection Fund allows guarantees to be taken into account for PPF levy purposes provided the expected recovery under the guarantee has been appropriately valued.

Our in-house insolvency expertise allows us to carry out insolvency analysis for trustees on a basis specified by the PPF, which could result in a lower PPF levy.

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Richard Hall LLB FIA

Founder

Richard is Head of Covenant Advisory and founded Argyll in 2013.  He has been a covenant advisor to trustees and employers for over 18 years, with an additional 12 years of pensions advisory experience.

He was previously Head of Pension Services at the rating agency Standard & Poor’s, one of the first companies to provide covenant analysis. He was also previously a Managing Director in the pensions team of Lincoln International.

He is skilled in negotiations and thinks creatively to find solutions acceptable to all parties.  He advises on all employer covenant matters, including mergers and acquisitions, funding negotiations and innovative support structures.

Richard is a qualified actuary and for 11 years provided actuarial advice to trustees and companies.  He uses his actuarial background to communicate effectively with Scheme Actuaries to ensure that the strength of the covenant is fully integrated into funding and investment decisions.

Richard is a Fellow of the Institute of Actuaries and holds an Honours degree in Law.

Richard Hall

rhall@argyllcovenant.com
+44 (0)20 7846 1000 (London)
+44 (0)118 334 5801 (Reading)
+44 (0) 7718 543168

“Richard negotiated an excellent package for three schemes and provided invaluable support throughout the transaction”

Chairman of Trustees, FTSE250 company

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Andrew Conquest FCA

Chairman

Andrew was previously a partner at Grant Thornton for 25 years.  He founded their employer covenant practice in London which he headed from 2003.  He has more than 40 years of providing corporate restructuring, insolvency and employer covenant advice, and has acted as a financial and business adviser to lenders, creditors, shareholders and companies in relation to pension scheme management.

Andrew is one of the most experienced employer covenant advisers in the UK and has advised in relation to a number of high profile transactions, including those involving regulatory intervention.  He has advised both the Pensions Regulator in relation to Scheme Specific Funding and the PPF in relation to scheme compromises.

Outside of Argyll Covenant, Andrew is also a professional independent trustee employing his many years’ experience of working with trustees and companies to find pragmatic funding solutions for schemes.  He is particularly well placed to help trustee boards understand covenant risk and interpret the advice they receive.

Andrew qualified firstly as a chartered accountant and subsequently was a licenced Insolvency Practitioner for over 25 years.

Andrew Conquest FCA

aconquest@argyllcovenant.com
+44 (0)20 7846 1000
+44 (0)7976 743944

“Andrew’s ability to leverage his many years of corporate expertise in a pensions situation is second to none. I would certainly want Andrew on my advisory team.”

Chairman of Trustees, FTSE100 company

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Sean Weaver BSc MBA MIPA

Sean previously spent 6 years as a Senior Consultant at Towers Watson providing advice on employer covenant-related matters to trustees and companies.

He worked for 7 years in the corporate insolvency and restructuring team at Grant Thornton and in 2006 was seconded to the Pensions Regulator’s corporate risk management team to review applications for Clearance under the Pensions Act 2004. He has a detailed knowledge of the working practices of TPR.

He began his career at Deloitte and between 1996 and 1998 he was consultant to World Bank, USAID, and European Union-funded institutional and financial reform programmes in eastern europe.

Clients benefit from Sean’s technical pensions and finance skill sets, as well as board-level relationship management and strong written and oral presentation abilities.

Sean is a qualified insolvency practitioner with 15 years’ experience of advising on corporate insolvency and restructuring projects.  Sean is based in our London office.

sweaver@argyllcovenant.com
+44 (0)20 7846 1000
+44 (0)7808 841065

“Sean was the company’s trusted adviser and provided invaluable support when we acquired a large UK group”

Global Benefits Manager, S&P500 company

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Paul Galpin

Senior Consultant

Paul is an Insurance, Reinsurance and Financial Institutions Specialist and leads Argyll’s insurance services. He was previously Director of Insurance Solutions at ING Bank and Director of Insurance Rating Services, Europe at Standard & Poor’s.

Paul has around 40 years’ experience working in the insurance industry, developing insurer financial structures, risk transfer solutions and rating models.

He is skilled in analysing complex financial structures and communicating the key features for clients.

Paul Galpin

pgalpin@argyllcovenant.com
+44 (0)118 334 5800
+44 (0)7718 588589

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Richard Hall LLB FIA

Associate Director

Rich was previously a Manager in the Pensions Covenant & Restructuring Team at PwC and before that in the Business Recovery Services team. Rich heads up our Leeds team.

He has worked for over 12 years in corporate restructuring and insolvency, and over 5 years in employer covenant. He is skilled in advising trustees on covenant and corporate transactions, with a specialism is developing complex insolvency models.

Rich is a CIMA qualified accountant.

Rich Walker CIMA

rwalker@argyllcovenant.com
+44 (0)113 397 9500
+44 (0)7739 985871

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Sarah Teeney ACCA

Associate

Sarah was a Business Analyst at BCMS specialising in corporate finance. Sarah has worked for over 20 years in finance with over 5 years in corporate finance, and over 4 years in employer covenant. Her specialism is advising trustees on covenant assessments, the impact of transactions and performance monitoring given her corporate finance background.

Based in our Reading office, she has worked on a diverse range of assignments from non-profit organisations to multi-employer schemes with overseas parents.

Sarah is an ACCA qualified accountant.

Sarah Teeney ACCA

steeney@argyllcovenant.com
+ 44(0)118 334 5805
+44 (0)7725 877808

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Gabriela Zoldova MSc

Analyst

Gabriela was previously a Corporate finance Analyst at HMT and before that a Corporate Development Analyst at Cabot Financial (corporate finance). She has worked for 4 years in corporate finance and over 3 years in covenant advisory. She is skilled in accounting and financial analysis, and in supporting client teams on corporate transactions given her corporate finance background.

Gabriela is based in our Reading office and holds an MSc in Corporate Finance.

Gabriela Zoldova

gzoldova@argyllcovenant.com
+44 (0)118 334 5806
+44 (0)7894 940665

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Lukas Juras

Associate

Lukas was previously an Analyst at KPMG in the Corporate Finance department of Deal Advisory. Based in our Reading office, he has worked for 5 years in covenant advisory and is skilled in accounting and financial analysis.

He has a Masters Degree in Economics.

Lukas Juras

ljuras@argyllcovenant.com
+ 44 (0)118 334 5804
+421 (0)918 764 391

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Jamie-Leigh Kirk ACA

Analyst

Jamie was previously an Audit & Accounts Specialist at Sagars for over 3 years, preparing statutory accounts for companies and pension schemes. Based in our Leeds office, she is skilled in accounting and financial analysis.

She is an ACA qualified accountant and holds a first class degree in Accounting and Finance.

Jamie-Leigh Kirk

jlkirk@argyllcovenant.com
+44 (0)118 334 9502
+44 (0)7960 900112

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John Smith

Analyst

Gabriela was previously a Corporate finance Analyst at HMT and before that a Corporate Development Analyst at Cabot Financial (corporate finance). She has worked for 4 years in corporate finance and over 3 years in covenant advisory. She is skilled in accounting and financial analysis, and in supporting client teams on corporate transactions given her corporate finance background.

Gabriela is based in our Reading office and holds an MSc in Corporate Finance.

Paul Galpin

gzoldova@argyllcovenant.com
+44 (0)118 334 5806
+44 (0)7894 940665

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Scheme apportionments

A Flexible Apportionment Arrangement (FAA) is a mechanism for transferring an employer’s responsibility for its pension scheme to another company without triggering a section 75 (insurance buyout) liability.  Trustee consent is required and trustees must be satisfied that in agreeing to an FAA the Statutory Funding Test is met (broadly that the scheme and its members will not be disadvantaged by the FAA).  FAAs are very common in particular where groups undergo a corporate restructuring.

A Regulated Apportionment Arrangement (RAA) is a restructuring mechanism that allows a financially distressed employer to separate itself from its liabilities in relation to its pension scheme, without triggering an exposure to TPR’s moral hazard powers or making the scheme ineligible for the PPF.  RAAs are much rarer and usually involve an employer that is at serious risk of inevitable insolvency.  In such a situation the scheme will usually enter the PPF in a controlled way.  TPR will want to be satisfied that the employer’s insolvency is inevitable and that the RAA provides a better outcome for the scheme than an insolvency process or the use of its anti-avoidance powers.

We have considerable experience of advising on both FAAs and RAAs.  For FAAs we are skilled in recommending appropriate mitigation to ensure the Funding Test is met, and for both FAAs and RAAS in supporting trustees in their discussions with the employer.

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Covenant assessments

Trustees are required to assess the strength of the ability of an employer to support its pension scheme as this is a central component of trustees’ risk management and has been a core theme of funding guidance published by the Pensions Regulator.

From an employer perspective the assessment of the covenant can have a bearing on funding assumptions used for actuarial valuations and investment strategy, and therefore the cost of supporting the scheme.

Employers therefore have a material interest in covenant assessment, how they should participate and, if necessary, question the outcome.

We help many trustee boards assess their employer covenant.  We also have an in-depth understanding of the trustees’ focus, and TPR’s expectations, for this analysis and the funding process in general.  We are ideally placed to advise employers on how to participate in and respond to a covenant assessment, and engage in the funding process more generally.

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Funding negotiations

At every three yearly actuarial valuation trustees and employers need to agree an appropriate level of funding to remove any funding shortfalls or to target self-sufficiency or even buyout.

We have an in-depth understanding of the trustees’ focus for the funding process as well as TPR’s expectations of trustees and employers.

We can help employers respond to trustees’ funding requests and support employers in negotiations to help secure mutually acceptable funding for the scheme.

We can consider the availability of non-cash security measures such as guarantees, asset-backed structures and charges over assets (contingent assets).

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Corporate transactions

A corporate transaction can have a material impact on the employer covenant.  Trustees will want to ensure that the scheme is not disadvantaged by such activity.  Employers will want to understand whether planned corporate activity could trigger mitigation requests from the trustees or even exposure to TPR exercising its moral hazard powers.

Examples of corporate transactions are:

  • Sales and acquisitions of companies and assets
  • IPOs
  • Debt refinancings
  • Corporate restructurings
  • Dividend payments
  • Share buy-backs

We have been involved in a large number of corporate transactions including many high profile situations.  We have an in-depth understanding of the trustees’ and TPR’s expectations in these situations, and are ideally placed to advise employers on how to achieve their corporate plans in an optimal manner.

We use our considerable corporate finance and restructuring expertise to advise employers on the potential impact of transactions on the covenant.  We can also support employers in their discussions with trustees and in liaising with the Pensions Regulator.

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Creative funding solutions and use of contingent assets

Contingent assets provide additional funding support for a pension scheme in certain circumstances.  For example, a guarantee could strengthen the covenant as the guarantor would meet the pension obligations of an employer in the event the employer were not able to meet them.  A charge over assets would entitle the scheme to an asset in the event the employer became insolvent.

Contingent assets can provide non-cash (when put in place) alternatives to pension contributions and strengthen the covenant.

We are used to considering the availability of contingent assets for employers and helping employers incorporate these into their funding discussions with trustees or as mitigation for corporate transactions.

We think creatively and have experience of a wide range of measures that can be used to identify additional security for members’ benefits.

Close

Insolvency analysis and outcome statements

Consideration of a scheme’s potential recovery on insolvency is an important aspect of covenant analysis.  Even when the likelihood of insolvency is remote, it is important for, and TPR will expect, trustees to understand the scheme’s priority relative to other creditors in a worst case scenario, and the impact of corporate events on any recovery.

We have considerable insolvency and restructuring expertise in-house which enables us to advise on insolvency outcomes.  We can construct relatively simple analyses to very complex models, from Estimated Outcome Statements to large group models known as Entity Priority Models (EPMs).

We can advise employers on the potential impact of transactions on the covenant.

Close

Investigations into the availability of TPR’s moral hazard powers

The Pensions Regulator has wide-ranging powers to prevent employers from avoiding their funding obligations, called moral hazard (or anti-avoidance) powers.  In particular, Contribution Notices allow TPR to require companies and directors to pay monetary amounts to pension schemes and Financial Support Directions allow TPR to require appropriate financial support is put in place for a pension scheme.  Further The Pension Schemes Act 2021 introduced criminal sanctions for individuals involved in activity that weakened a pension scheme’s security.

Employers will want to ensure that any planned corporate activity will not trigger an exposure to TPR exercising its moral hazard powers.

We have a detailed understanding of the eligibility criteria for TPR’s powers.  We can prepare eligibility assessments to assist employers in planning and executing corporate activity and to recommend appropriate mitigation to minimize moral hazard exposure.

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Insurer due diligence

For many trustee boards the ultimate goal in finding security for their defined benefit schemes will be to transfer responsibility for the schemes to an insurer.

These transactions are known as bulk annuity purchases and can be structured as either buyouts or buy-ins.  A buyout involves usually all the scheme liabilities transferring to the insurer and the scheme is then wound up – it has no further link with the employer.  A buy-in involves the insurer paying benefits for part or the whole of the membership but ultimate responsibility for all scheme obligations remains with the scheme and the sponsoring employer.  A buy-in policy is an asset of the scheme.

Both buyouts and buy-ins represent material transactions for trustees and the handing over of substantial amounts of scheme assets to an insurer.  Like any material transaction affecting their schemes, Trustees will want to be sure that they understand the risks involved and they are satisfied that the insurer will be a suitable counterparty to assume the liabilities.

Insurance regulation is designed to ensure insurers have sufficient assets to meet their obligations.  However the insurance market and regulatory environment is complex and may be unfamiliar to many trustees.

Argyll has dedicated insurance expertise and detailed knowledge of the complex structures in which insurers can be invested.  We are not usually otherwise involved in the buyout or buy-in process, which means our analysis is completely independent, strengthening the Trustees’ governance trail.

We can help trustees by providing due diligence reports on insurers to help them understand the insurers’ financial strength, how they compare with their peer group and ultimately get comfortable that the buyout or buy-in should proceed.

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Joshua Jayaratne

Analyst

Joshua was previously an M&A Insurance Analyst at insurance broker Howden M&A, advising on transactional risks in the M&A process and aiding the implementation of insurance solutions to mitigate transaction risks.  He had a particular focus on private equity transactions and the UK Real Estate market.

He has also had a number of M&A related internships at corporate finance firms and a Big 4 accountant.

He is skilled in financial due diligence and analysis, in particular in relation to M&A transactions.

Joshua holds a degree in Economics.

jjayaratne@argyllcovenant.com
+44 (0)118 334 5802
+44 (0)7599 986289

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