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00;00;31;28 - 00;00;33;05
Dan Naylor
Do you have thoughts on that.
00;00;34;06 - 00;01;01;16
Karina Brookes
Karina Yeah, absolutely. So I think and you know, we've talked about before, I think it's really important to plan ahead for that kind of situation. We've seen that funding levels can move very quickly and people can find themselves in that kind of situation. But for anyone expecting it, so some of these structures that that schemes can put in place like a reservoir trust, for example, like an asset backed funding structure which can be switched on or off depending on funding levels.
00;01;01;24 - 00;01;11;10
Karina Brookes
So some of these things can allow trustees to and companies to manage the situation so that they don't get to a surplus and that surplus isn't trapped in the scheme.
00;01;12;00 - 00;01;27;17
Dan Naylor
And interesting perspective, also interesting for those rather have the money in the scheme in a sense. So from a trustee perspective what's the what are the key things that trustees are looking for when agreeing to these sorts of out of scheme funding structures?
00;01;28;12 - 00;01;52;29
Eimear Kelly
So I think that's really important to, you know, make sure that any structures that are put in place, you know, are legally enforceable and have the right protections for the trustees that they can access the money, you know, when they need us. And if there is an event of sort of corporate distress, that's quite important. And that's, you know, certainly something that some will be on their minds where there's an asset by contribution involved.
00;01;52;29 - 00;02;15;26
Eimear Kelly
You know, they'll clearly want to make sure the assets underpinning it all has a value in a distressed scenario. And, you know, again, there's value to be access there when it's needed. Some of the structures we're seeing at the moment, they are also be they're being set up in such a way that the investment trustee within can be complementary to the existing investment strategy and that can be attractive.
00;02;15;26 - 00;02;21;29
Eimear Kelly
But again, you know, that's an area where trustees, you know, want to have a hand in the design.
00;02;22;11 - 00;02;36;15
Dan Naylor
And that's interesting. You talk about this earlier when there's more flexibility, clearly to what you can do with money outside the pension scheme, the money inside a pension scheme, Joe, I mean, we've seen what's that what what are you sort of thoughts on that? That's not something that I've typically seen as being an advantage of this sort of structure.
00;02;36;22 - 00;02;39;29
Dan Naylor
But the conversation we were having the other day made me think that actually there are some real.
00;02;40;05 - 00;03;00;23
Joseph Wren
It definitely is, because again, when you build whatever it is, whether it's the fund side or whether it's the contribution structure, again, the the sort of wrapper that goes around these can look like a lot of different things. But from a legal and regulatory perspective, there are obviously very, very prescriptive rules that must be followed in terms of managing assets within the scheme.
00;03;01;05 - 00;03;22;12
Joseph Wren
Now you can to some extent free yourself from some of those shackles when you're running assets outside the scheme. Now that obviously still needs to be in conjunction with the rest of the asset mix within the portfolio of assets that the trustee has before. Example, you can put some potentially risky or more interesting or high yielding assets outside the scheme.
00;03;22;28 - 00;03;41;07
Joseph Wren
You can set them up in a in a structure where the trustee is seeing real benefit to that because they're getting exposure to these higher returning assets. But then also you can enter into an arrangement where the sponsor is seeing some of that upside as well. So in an ideal scenario, we get that when when we're sort of everyone, you know, benefits from having this set up.
00;03;41;23 - 00;03;53;25
Joseph Wren
And also it adds some interesting things, for example, like the ability to see borrow against assets which are held in funds outside the pension scheme. Now that can be useful for a whole variety of reasons if liquidity is required.
00;03;53;25 - 00;03;57;28
Dan Naylor
I guess the recent LBI thing would be an example of where being able to move quick in that way would be.
00;03;57;28 - 00;04;18;02
Joseph Wren
Exactly, exactly. And so again, if you find yourself in a position where in the ordinary course you might have been looking to liquidate assets that you didn't want to as a as a sort of fire in a distressed market. If, for example, you could borrow against assets that are sitting outside the scheme, that might be just another useful, useful tool to have.
00;04;18;10 - 00;04;45;18
Joseph Wren
But again, always making sure that that any kind of exposure to these to these outside of scheme assets is proportionate, that the trustee is approaching it in a perspective which it thinks is sensible and there's an adequate underpinning so that actually, if it doesn't perform as anticipated, the trustee has that level of security and I mean security not just in the sort of narrow sense as a lawyer, but actually how secure are these assets and what is the other recourse that we have, whether that's the sponsor balance sheet or otherwise?
00;04;45;18 - 00;04;47;27
Dan Naylor
So many of these things always circle back to covenant building.
00;04;47;29 - 00;05;04;23
Karina Brookes
I think they do. And that's that's the key is and it is the right covenant underpin and that can be, as I've just said, access to the sponsor balance sheet. In a wider sense. It can be access to a particular asset in a sort of more traditional security structure. It could even be third party insurance or letter of credit.
00;05;04;23 - 00;05;22;13
Karina Brookes
We've seen that in some situations. More recently, if a sponsor has a strong covenant, they might be able to access life cheaply that kind of underpin for the scheme. So I think that's absolutely crucial. And you know, when you're structuring something like that, it's really important to look at the quality of the asset, as Emma said, and how you access it.
00;05;22;13 - 00;05;33;18
Karina Brookes
So that sort of legal documentation around when you can access is and those trigger points is almost more important because actually if you can't access, it doesn't matter how good is. So then that's a really key thing for trustees to think about.
00;05;33;23 - 00;05;55;01
Joseph Wren
Yeah, absolutely. And one other consideration in the mix here for for sponsors is if there's additional costs and complexity being brought in as a result of this structure, effectively, who's paying for it? What are the other considerations around it? Because again, it can look very appealing to these assets. But if you're building something that needs an external manager and needs to be run, there's a compliance cost associated with it as well.
00;05;55;11 - 00;06;06;03
Joseph Wren
We have to make sure that what we're coming up with, again, delivers that benefit for the trustee, for the sponsor, and doesn't create a huge amount of sort of compliance and administrative of burden around the site.
00;06;07;17 - 00;06;27;12
Dan Naylor
So we've seen obviously recently with the sort of the the elderly issue changed the fortunes of lots of schemes are quite dramatic actually in both directions good and bad. I mean, does that, does that give us some some pointers just as to when we should start to think about surplus? It clearly can arise or or evaporate relatively quickly.
00;06;28;05 - 00;06;53;17
Eimear Kelly
Yeah, I think that's very Samson. Absolutely. I think, you know, as we've seen, things can change quite quickly. So, so now is really the time to be to be planning ahead. And in particular with the new funding code and new regulations coming out, there will be a requirement to have a written and game plan in place. And so, you know, potentially the conversations around that could be a good time to bring this sort of planning into the equation.
00;06;53;17 - 00;07;06;09
Eimear Kelly
Or alternatively, you know, the next valuation, triennial valuation after all of last year's turmoil, you know, that that feels also like a sort of a useful sort of milestone to to start having these conversations.
00;07;06;17 - 00;07;24;26
Dan Naylor
It does feel like a point in time where there will naturally sort of be that conversation, particularly from a trustee perspective, just sort of when a security advisor happens for a minute now, clearly trustees will not want there to be disincentives, women from employers sort of putting the money into pension schemes that they want to get to, that that designated chosen end point.
00;07;25;14 - 00;07;43;04
Dan Naylor
And some of that might require trustees to give corporates comfort around avoiding these surplus situations, building up or even some comfort around what might happen if a surplus does arise. And so do join us for the next session where we're going to be talking about schemes that have already got a surplus and the sorts of things that trustees and Corpers will be thinking about.
00;07;43;04 - 00;07;43;22
Dan Naylor
In that scenario.
