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According to research conducted by Herbert Smith Freehills and Grant Thornton UK LLP, 57% of pension and restructuring professionals surveyed believe the extended powers given to The Pensions Regulator (TPR) in October 2021 mean defined benefit (DB) pension schemes can expect to achieve a better outcome in a multi-creditor restructuring scenario than they would have done before those powers came into force. This is significant given that almost all of those surveyed (92%) expect the incidences of corporate distress to increase over the next 12 months. 

Commenting on the findings, Rachel Pinto, pensions partner at Herbert Smith Freehills, says: "Lenders and other corporate creditors are clearly alive to the risks posed by TPR's enhanced powers and the need to have regard to the interests of any defined benefit pension scheme involved in a restructuring scenario. Failure to do this could lead to an investigation by the Regulator, financial penalties or, in a worst-case scenario, a criminal prosecution".

The data also shows that 65% of pension and restructuring professionals think the changes to the UK insolvency regime made in 2020 have increased the likelihood of a successful restructuring being achieved in a distress scenario. At the same time, 62% consider that the UK's insolvency regime strikes a fair balance between lenders and DB schemes, while 24% believe the regime favours lenders to the detriment of DB schemes and 13% believing the regime favours the interests of DB schemes over lenders.

Commenting on what it takes to secure a successful outcome Paul Brice, Partner in Grant Thornton's Pensions Advisory Practice, says: “Successful multi-creditor refinancings and restructurings require key stakeholders to understand the commercial and legal needs of other participants in the deal: these may not always be obvious – but a failure to get inside each other’s heads can lead to unnecessary heat and light and, potentially, value destruction”.

To help stakeholders affected by corporate distress understand one another's perspectives, Herbert Smith Freehills and Grant Thornton have teamed up to run a series of workshops for trustees, lenders and bondholders. The firms have also collaborated to produce 'Getting inside each other's heads' - a paper which explores the likely position and priorities of such parties in a distress scenario.

The need for mutual understanding to help achieve a positive outcome is supported by Mike Birch, Director of Supervision at TPR, who took part in the workshops to help participants to understand TPR’s perspective, said: “Restructurings are complex and time-pressured. Misunderstandings between stakeholders can make an already critical situation harder to resolve positively. While TPR stands ready to intervene and to use our powers, it should be possible to resolve most situations without formal action. That’s why I welcome this initiative to help banks and trustees to understand each another’s positions and to work constructively together in future restructurings.”

'Getting inside each other's heads' is available for free download here.

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Rachel Pinto

Partner, London

Rachel Pinto

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Mike Petrook

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London Employment, Pensions and Incentives Restructuring, Turnaround and Insolvency Finance Corporate Financial Institutions Banks Rachel Pinto