Liquidity preservation: managing social housing pension schemes during the Covid-19 outbreak

With the onset of the Covid-19 outbreak, sponsors have been looking at ways to preserve cash and maximise future liquidity including how they fund their pension obligations. The Pensions Regulator has issued detailed guidance noting that pension scheme trustees should be open minded to requests from sponsors to defer the payment of pension contributions if there is a genuine business need for them to do so.

The Regulator has understandably indicated that any period of suspension should be as short as possible (initially no more than 3 months). However, if there is a genuine business need for a longer period of deferral, pension scheme trustees should consider what additional protections they can obtain eg: parent company guarantees, letters of credit, charge over assets etc.

Aside from the current circumstances, we are increasingly seeing sponsors use a range of contingent assets to manage their contribution levels and to extend the period over which exit debts can be paid.

Please see the audio recording from May 5, with guest speakers, to discuss the dynamics of the current social housing pensions landscape.

  • David Cassidy: Thank you, Leann. Much appreciated and apologies for the slightly tardy start to this call. The roads maybe not be jammed but phone lines are this morning. So, apologies for that.



    Hi, I'm David Cassidy. For those of you that don’t know me, I've got the privilege of leading the Barclays Social Housing team.



    Big thanks for joining the call, first of all. It's great to have so many people on the line. And thank you for taking the time to dial in.



    Delighted to have some expert speakers talking this morning. We have Paul Carberry and Hanna Beacham from Gowlings, Mike Richardson from Lane Clark & Peacock. They will take us through some formal content and hopefully, you have some slides that you can navigate through their content.



    In addition, we have Barry Madden and (Holly Stokes) on the line from the Barclays trade and working capital specialist team. I will ask Barry to introduce himself and his role after the formal part of the presentation and both Barry and Hanna will be available in the Q&A session that I hope follows proceedings.



    Before that, I just wanted to spend two minutes on a bit of context around today's call, if I may. So, we're six weeks in to an unprecedented lockdown, an extremely challenging time for all business.



    With the concentration on social housing, I believe, through the discussions that my team are having with you and your colleagues and I'm having with chief execs, SDs, and external stakeholders.



    I believe the (sector) is rising to the various challenges that (inaudible) at the moment. In terms of Barclays focus, it's really – a really simple message. It's how can we best support our clients through this and as we begin to come out of it, how can we support a return to some sort of normality.



    We're concentrating at the moment on two really key areas. One is operational stability. It's not lost on us but lots of people are working from home for the first time, both in your organizations and our organizations.



    Many and quite challenging circumstances, it has to be said. And what we're observing and what our clients are observing is a great spirit and resilience among all of that working from home. So, it's something, I think, your organizations can be proud of.



    Secondly, really, it's making sure that the operational, (let's say), stability is maintained, beneath that human side and I'm delighted to say that, for those of you that are banking with us, we're moving money around. We're keeping it safe. And that side of the business.



    (Inaudible), you always have to (inaudible) technology, unfortunately, but that side of the business is performing very well. The second main area is supporting financial resilience which is, obviously, our – what we exist primarily for.



    I'm going to talk very, very briefly about the four areas we're doing that and then hand over to our speakers. First, the bank of England scheme and for larger clients, CTFF, we are actively involved and encouraging the use of that scheme and we're working with several large organizations to establish and prove eligibility and use of that scheme, delighted with that work.



    On the bond side, it is a great reflection on the sector, I think, that the bond markets are open and they're functioning very well, actually. Barclays have been front and center on the for April sterling bond raisings and that – and we've been delighted to work with all those clients.



    And then thirdly, we've got on balance sheet lending. So, we do have an active pipeline of lending and support for clients. We've closed out a number of deals through the end of March and early April and our commitments and our obligations to clients and we're continuing to look at further new lendings, new support to clients as we speak.



    In fact, the first call I had this morning was taking a couple of fairly significant transactions through first-stage approval process.

    The fourth area is really around liquidity preservation and optimization. So, once you have the liquidity, how do we preserve that? How do we (make) best use of it?



    And today's content, I really hope talks to that last point. So, with that, I will hand over to Paul Carberry for the first part of our formal presentation. Paul, thank you for joining the call.


    Paul Carberry: Thanks, David, and good morning, everybody. For those of you who are following the slides, can I just refer you to the first Gowling slide entitled, Pensions Regulatory Guidance.



    So, global pandemic has had an impact on all sectors of the economy. Many organizations are now taking (inaudible) cash flows. And for those organizations with defined benefit pension schemes, an obvious step is to see to reduce deficit reduction contributions, payable to their pension schemes.



    The pension regulators recognized (inaudible) needed around pension scheme contributions. The regulators encouraging trustees to be open minded about any employee proposals to suspend contributions and the regulatory guidance has been with us since 25th of March and has been updated a week later.



    In headline terms, the (regulatory expects any) contribution suspension to be limited to the shortest possible period. That makes sense. And any suspension should be for no more than three months unless there's a very clear financial case (inaudible).



    So, the trustees and the regulator have got (balanced enough here). One the one hand, they want to maintain the schemes from (inaudible) so they want the cash coming in. And on the other hand, they want to ensure the ongoing sustainability of the schemes concept. There was a (inaudible) is the best way to secure member's benefits for a long term.



    So, to balance these two competing interests, it may be appropriate to – for the trustee to agree with the employer, a sure (inaudible) space to allow the employer to manage its cash flows sensibly.



    So, there's an opportunity here for employers. And you may have seen some high-profile cases around deficit reduction suspensions. Arcadia, for example, and Debenhams have (hit the press).



    Initial indications are that 1 in 10 employers across the country, obviously, some sort of suspension or reduction. But to be clear to employers that there's no blanket approval here that will not be always straightforward for an employer to agree to suspension or reduction and with very different issues for particular schemes, particular trustees, and particular employers.



    So, within this context, I think scheme employers need to understand what the regulated guidance says and what's the expectations are of trustees. Because if you understand that context, it's much easier for an employer to put together a proposal that’s comprehensive, that’s compliance, and that’s much easier for trustees to accept.



    Just moving on to practical experience. What we're seeing across our client base, there's already been a significant number of the question (and various) responses for trustees to agree to contribution reductions.



    And in broad terms, we'd say it was in different types of proposals. The first are comprehensive, they're very mindful of the regulatory guidance and to deliver it in a really timely manner.



    The second (comp) with less detail and there's a lack of a clear business case being provided. And, actually, (inaudible) some very different outcomes of these different proposals.



    From our experience, we were seeing some clear comprehensive proposals. It's a much easier request of the trustees, negotiations are easier, and the contribution suspension is agreed much more smoothly.



    For the less comprehensive cases, it's a very different outcome. Negotiations can be difficult. And in many cases, the request for suspension is just being (reported).



    So, I think the message is clear. Scheme sponsors (wish to) manage their pension contributions. We need to give appropriate way to the regulator guidance and reflect that on any proposals they make.



    So, just moving on to the regulators key principles. (Inaudible) I'd like to draw out and should clearly be reflected in any sponsor proposal. And the first of the four is establishing the need.



    Suspension will not be needed or appropriate for our employers. As I've said, it's no blanket approval here. If an employer can pay its contributions, it should do so. So, it's incumbent on an employer to clearly demonstrate as a genuine affordability issue to make that plain in any case to its trustees.



    The second of the four principles are ensuring that all parties are playing their part. It wouldn't be right to ask pension scheme to take all the (paying). It wouldn't be fair and the trustees won't be able to agree to that.



    So, employers need to make it plain that trustee support will be alongside the support of all the stakeholders. And what do I mean by that? Well, any proposal for an employer that should set out, are all the creditors being treated. Those (will make play) that no dividends will be paid and no (inaudible) loans will be allowed during the period of any contribution suspension.



    (Inaudible) the parties are strengthening their access to an employer's (assets) through security, pension scheme should be given the same fair share of new security, not to do so will be detrimental to the pension scheme and will be unacceptable to the trustees.



    In a moment, Hanna will touch on various types of security and contingent asset that work well for trustees. Examples are (inaudible) company guarantees and letters of credit. It will be much easier for the board of trustees to agree to a contribution suspension in some alternative form of non-cash (support) is available. And this will particularly be the case if you're looking for suspension period of beyond three months.



    The third of the fourth principle is being flexible about restarting new contributions. Clearly, at the moment, it's very different to provide long-term financial forecasts. Any proposal to trustees should make it plain when the suspension date will end. There should be some certainty there, how long contributions will not be paid for.



    Employers should not be (inaudible) an update. If things return to normal quicker, and contributions become affordable again quicker and then there should be triggers built in to the plan to allow the contributions to start again.



    And then the fourth of the four principles is providing the right information are absolutely key. And certain circumstances, there will be an acute business near you to suspend contributions on (inaudible) limited opportunity to present a comprehensive case that the pension trustees. That’s life. That happens. But the regulators clear and should circumstances, I think the (inaudible) a very short period of time.



    Now, to give that some practical context, we're currently asking for (inaudible) pension trustees that employee will seek in a three-month deferral that didn’t make it the case. So, to support the sponsor, the trustees (are willing) to agree to a one-month deferral (inaudible) anything (fairer) need to be built on a more robust business case and a demonstration of affordability issues.



    Interest suspension is put into place and information provision remains key. The trustees won't just look away. They’ll need to carefully monitor the impact on employee covenants of the pandemic and you'll need to clearly understand that contributions are affordable again.



    To employers, as part of their proposals and made plan, what financial information they can provide to their trustees and what (inaudible) have we made available?



    Again, returning to the area of longer-term suspension, information provision, absolutely key. Trustees need to be confident that they fully understand the ongoing covenant to their sponsor. And a longer term suspension, that needs to be supported by any available protections so information around negative pledges and what other contingent assets can be made available, will be really helpful to trustees.



    Just moving on to implementation issues, there are different mechanisms with defer in contributions. The most obvious (is to amend) your schedule of contributions and just allow for the contributions to be deferred.



    The second is to leave your schedule of contributions in place and the trustees temporarily agree not to (inaudible) the employer for their contributions.



    From a legal perspective, (our advice) is clear, we're very, very strongly to view the schedule of the contribution should be amended whenever possible.



    Not to do so can result in so (inaudible) consequences. Certain scheme rules allow for the schemes to be wound off if contributions aren’t paid. And also, payments be conjured (inaudible) contingent assets of contributions aren’t paid. They are not (inaudible) to any party (we want) in these circumstances.



    Final point around practical issues is just to say that whatever mechanism, the issues to the fair contributions, the regulator is absolutely clear. If contributions are reduced and suspended, they should be still repaid with an existing recovery plan timeframe. That should not be spun out any further than it's currently permitted.



    So, just briefly to summarize before I pass over to Hanna, reducing contributions is an option for some employers. If employers are considering this area in any detail, it should be mindful of the regulator's guidance and the expectations on trustees and that should shape their proposal.



    Any proposal to the trustees should address affordability, should clearly set out how are the stakeholders are being treated, (inaudible) wherever possible (offer) some contingent support, some contingent assets available to the trustee, and finally, information provision absolutely key, what financial information is available now and what would be provided over the period of the suspension.



    And now, I'll just pass over to Hanna. Thank you.


    Hanna Beacham: Thanks, Paul, and good morning, everyone.



    For those of you who are still following along on the slides, if I could ask you to turn to the next slide which is headed Contingent Assets and Overview. So, I'm going to move on now to talk about contingent assets which is something we're seeing a lot of interest in as a tool to help employers manage pension costs, in part, because of the current charging circumstances we all find ourselves in, but actually before that was a really hot topic for lots of our clients.



    In outline, I'm planning to spend a few minutes describing what we mean by contingent assets and what the most common options are. I'll then share some thoughts on the key factors to consider from a legal perspective when thinking about whether our contingent asset is the right solution for you.



    That should then lead on to Mike from LCP who's going to take about some of the issues from an actuarial perspective.



    So, to start with what we mean by contingent assets, put simply, a contingent asset means an asset provided by sponsoring employer which the pension scheme can only access in certain pre-agree circumstances, hence the reference to contingency.



    Mike going to talk in more detail about why they're useful from a scheme – pension scheme funding perspective. But in very broad terms, offering a contingent asset should improve the pension scheme's view of the strength of the covenant, the employer supporting the pension liabilities.



    And again, slide oversimplification, but the stronger the employer covenants, the more likely the pension scheme will be to a great spread deficit contributions or other payment obligations over longer period of time and that, in turn, would help the employer with its cash flow commitments.



    Now, there are a number of different legal structures which can be used for contingent assets. The first type of contingent asset which we commonly see in the pensions context is a parent or group company guarantee. This is a legally enforceable commitment from a third party, generally a parent or a group company to meet the sponsoring employers' financial obligations if not sponsoring employer defaults.



    It will be set out in a legal documentation – in a legal document and the key terms which would need to be negotiated would typically be who is the guarantor, what obligations are they guaranteeing, and is there any cap or other time limits on the guarantee.



    Now, on our experience, we see guarantees most commonly in a mainstream corporate context. For example, why have a large or a complex group structure, perhaps of overseas parents or sister companies that have trading income separate from those of the sponsoring employer.



    In a social housing context, the legal structure of the group might be such that you might have a bit more difficulty finding a suitable guarantor but for some organizations, it's definitely worth exploring and for our pension trustee's perspective, a guarantee is a relatively common and tried and tested way of providing covenant support.



    In some cases, a guarantee can also lead to a saving on the PPS pension protection fund levy which relates to the pension scheme, and that’s another common reason why we'd see a guarantee put in place.



    The second type of contingent asset that I wanted to mention in escrow arrangements. Now, this is where the sponsoring employer puts cash or assets in to a nominated bank account or custody account which is looked after by a third-party custodian or bank and the pension scheme can only access those assets in particular circumstances.



    For example, if the employer becomes insolvent or scheme funding falls below a particular trigger point. Now, the main benefits of escrow is that it can be helpful to avoid the problem with (inaudible) in the pension scheme.



    As you might know, if you pay contributions into a pension scheme and it turns out later that the scheme has been overfunded, it's really challenging for both the (caps) and the pension's regulatory perspective to get that money back again. So, employers who have a different view about, for example, their expected investment performance of the pension scheme assets, they might view escrow as a more (palatable) way to hand over the cash because they can be certain it won't be locked into the pension scheme.



    The main downside to escrow accounts is that they can be quite fiddly to establish because you need to document the rights, the obligations, of several parties. They're also not particularly helpful, I think, as a means of improving the employee's liquidity position because the money has to remain within the escrow accounts which, by default, means the employer can't use it for other purposes.



    Moving on to the third type of contingent assets, this involves what could be termed banking solutions. Meaning, a bank is involved and standing behind the security. So, these solutions could include a letter of credit which is a letter from the bank which acts as a guarantee for certain payments or a bank guarantee, whether bank agrees to make payments in the events of the employer's default.



    This can be especially helpful if the employer doesn’t have a group or parent company that provides security in a form of a parent company guarantee.



    The pension scheme, I think, is also quite likely to place a high-value on bank security because they will view a bank as a very secure source of funds. The potential issues that employers would need to consider (inaudible) on banking solutions would be, firstly, to make sure they understand the terms and their obligations, and in particular, that they understand the cost of procuring that solution and the due diligence requirements that the bank is likely to have before offering security.



    And finally, the fourth type of contingent asset which may find in the pensions context is the most complicated and it goes by different names but we most commonly see it referred to as either asset-backed funding or asset-backed contributions.



    Now, this is a little bit hard to describe in a time that we've got available. But the basic idea is that the employer and the pension scheme establish a special purpose vehicle into which the employer places some assets.



    The assets could be real estate, intellectual property rights or tangible assets, but there need to be something which is capable of generating an income. Now, depending on the sector, we've even seen things like casks of whiskey used for this.



    So, once you’ve established the special purpose vehicle and put the assets into it, the income stream from the assets is then used to pay the contributions for the pension scheme. There's a lot of legal documentation which sits around this or sits out of the circumstances which the assets will be returned to the employer once all the payment obligations and the scheme have been met and also the circumstances in which the assets could be passed to the pension scheme. For example, if the employer becomes insolvent before the end of the period.



    There are a number of reasons why the structure might be used. If done correctly, it can be really beneficial from a cash flow perspective because it's the assets which generate the income which is needed to pay the pension contributions and the employer shouldn't need to then top up.



    If all goes well and depending on the part of assets, the employer still should get the underlying the assets back at the end of the agreed period.



    Having said that, this is, by far, the most complex solution from a legal perspective and there are lots of practical issues that would need to be worked through starting from identifying and valuing the assets and the results in cash flows that come from them right through to agreeing all the commercial terms and how the agreement will work and the tax implications of that.



    So, in our experience, we tend to see asset-backed contributions most commonly weather the deficit of a big-enough size to make it proportionate. So, if you have a smaller deficit and you could pay it off or get some other form of security, you might not be interested in this approach.



    The employer also needs to be able to identify some appropriate asset to use. And in this context, (inaudible) that there are some regulatory problems with using social housing stock for that purpose.



    So, that was the high-level overview of the different types of contingent assets. And I want to spend a few minutes just talking about – through the key factors for employers to consider when deciding whether any of these options would be helpful to them.



    The main consideration will be custom benefit. There's no points in pursuing a really complex and costly solution if something else will do the same job for a lower cost.



    It's quite difficult to rank the different types of the contingent asset I've just mentioned in cost order. But in general terms, you can safely assume that asset-backed contributions, asset-backed funding is at the more expensive end of the scale, but can also potentially bring some really big benefits in the right case.



    The other end of the scale, in terms of set up costs, it's probably something like a parent company guarantee but the benefits of offering that guarantee will very much depend on who the guarantor is and what they are to the covenant support.



    Staying with custom benefit, I'd also note that solutions involving a third party, for example, escrow, where someone has to operate the arrangements or the letter of credit which requires the bank to provide the service will also incur about third party costs. So, as an employee, you'd want to understand what they are and how you'd pay for them.



    Another important consideration will be how your business is structured. So, there's no point considering a parent company guarantee, for example, if you can't identify a company which could give that guarantee.



    Either because your group structure doesn’t have any other group companies or they don’t have additional assets or they're already exposed to the pension scheme as a sponsoring employer so they don’t add anything to the covenant. Or in some cases, they may be a parent company or a group company that you may not have any means as convincing them to provide the guarantee. And the decision not to expose certain parts of the group to pension obligations is, in many cases, deliberate.



    Moving on, another key factor to consider is what assets could be offered as security. I mentioned a minute ago that one of the assets social housing providers tend to have a (lot of) is real estate but because that may take the form of social housing stock, they're likely to be some regulatory restrictions on what he can do with this in practice.



    In our experience, these regulatory restrictions may, for example, that we haven't seen a big take up for asset-backed funding as a solution in this sector in the present time.




    Another consideration will be the impact on other creditors. In particular, you might have restrictions in your existing banking and borrowing facilities that would restrict your ability to grant (me) security or enter into legal obligations that would affect the priority order of creditors. This is something which would need to be checked very carefully, whichever solution you're thinking of implementing.



    And finally, for any of the solutions, you'll want to make sure you understand the legal obligations, not only in terms of direct payment obligations but also whether you're required to give warranties or indemnities or any kinds of commitments which could be capable of leading the claims against you.



    So, to summarize before I hand it over to Mike, a contingent asset is an asset which is only available to the pension scheme in certain circumstances. The benefit to the contingent assets is that in the right circumstances, it can improve the scheme's view of the covenant and lead to more attractive payment term to the sponsors.



    (Very) differently, you have structures which can be used, each have its pros and cons and they need to be weighed up. And in practice, some of the options I've mentioned are not used frequently in your sector. For example, asset-based funding.



    Others, like letter of credit, are used much more commonly to good effect. Which brings me on to hand it over to Mike from LCP who's going to talk through some of the issues from an actuarial perspective.

    Mike Richardson: Thanks, Hannah.



    Good morning, everybody. So, as Hanna said, I'm going to talk from issues (looking) at the actuarial (inaudible). I've also looked at how they might be of relevance for the (inaudible) pension schemes that’s tend to operate within the sector.



    On slide, if we could just quickly (inaudible) context. Then (inaudible) taking a step back, a useful place to (inaudible) the pension regulator as that pension schemes need to consider the risk they're exposed to.



    And (inaudible) there are integrated risk managements that we need to consider (inaudible) and funding risk together and their interactions on each of that.



    Taking (inaudible), you have covenant risks to the risk that the – associated with a sponsor, sponsor is there to support the pension scheme (inaudible) into investment risk and the level of investment risk to approve this (inaudible) that they can take, potentially if you (inaudible) downside risk will be dependent on the strength (inaudible) from a sponsor.



    And then that investment strategy (inaudible) to the funding (inaudible) what we're seeing. And I think (inaudible) from the equation (inaudible) take that back where does the money actually come from to pay members deficits (inaudible) come from monetary places either assets of the scheme or (inaudible) they already hold (inaudible) returns but (inaudible) in the future (inaudible) that’s in contribution to the sponsor or members will pay into the (fee).



    We've not (inaudible) the balance between investment returns and cash if the trustees (inaudible) to the extent that additional investment returns are achieved and the cash required will be lower. The trustees view of the covenant of the employer covenant is that it is weaker than they (inaudible), they may fail – and therefore, they need to change the investment strategy and target a level (inaudible) investment return, (the lower) level of risk and that would translate into additional cash being required, a higher level of contribution.



    The flipside is if the trustees may be (inaudible) better view (inaudible) their view of sponsor was stronger, they may be willing to take a more investment risk which will trans – potentially translate if those additional investment returns were achieved to translate to lower cash requirements from a sponsor and (inaudible) cash.



    And a contingent asset as we've seen, perhaps is absolutely one way that can be used to improve sponsor's view of the covenant of the (inaudible).



    We've got (inaudible) experience with that and working with associations to agreed packages with their trustees consisting, as Paul said, consisting of contingent assets and contribution together which (inaudible) (reduce) the level of upfront cash needed to pay – to go into the scheme. The level of contribution won't be sufficient without the provision of that contingent asset.



    I think it is also really important to say that (inaudible) actually depend on what your objectives are for the scheme. We're talking here about some objective of minimizing the cash which is payable upfront. And (effectively_, accepting some investment risk in order to do so.



    I will say (inaudible) clients their (coming) asset from the opposite direction and looking to prepare a higher level of contribution into the scheme, increasing the cash with the (inaudible) which is seeing that the (inaudible) investment returns (bar) down to derisk the scheme quicker and get it to a fully derisk position in the short to median term rather than longer term.



    Absolutely, I think the key there is to understand what it is you're trying to achieve and then (inaudible) some of these continued asset solutions can be an important part of the toolkit for getting to that place.



    Looking at the next slide is just an example of some of the different cash flows within one of these (inaudible). Looking at the letter of credit, you have the scheme sponsor, they pay the premium to the bank, so that the sponsor sets up a letter of credit and is responsible for paying a premium.



    Not (in their means), but if a trigger event occurs, that could be a default, it could be a covenant breach or something similar. But (inaudible) that if the bank will pay a lump sum into the pension scheme.



    At the same time, the sponsor is also likely to be paying cash contributions into the pension scheme albeit (inaudible) to a lower rate than would be acceptable without the provision of the selector of credits.



    So, from the pension schemes perspective, they're getting the cash from sponsor and they also have the protection of the issue of lump sum payable from the bank if one of these events occurs. So, they’ve taken that (package) be happy or hopefully happy with that kind of approach.



    If the (inaudible) course, then (inaudible) of payments into the pension scheme and then looks to recover what they can from the sponsor. So, that’s the sort of the different cash flows within this particular mechanism.



    As an example of how about (inaudible) in practice for particular valuation negotiations, the next slide, you're looking at a fairly (inaudible) example. We've got a relatively small pension scheme. So, let's say assets or 50 million, liabilities of 70 million, a deficit of 20 million pounds.



    Now, one approach could be to look (inaudible) deficit over, for example, five years which would be contributions of (inaudible) the dark blue bars in the bottom left.



    If you'll turn to the approach, it might be to put this a letter of credit or (inaudible) continued asset in place (inaudible) the sponsor would pay the premium for (inaudible) additional cost would be required. But once it's in place, it provides protection for the scheme against sponsor default, problem (breach), what (inaudible) trigger events are.



    So, the scheme has additional protection that (inaudible) trustees feel they (inaudible) longer to get the cash into the scheme, so they can have it in longer term recovery plan. And it also means that they (inaudible) able to take more investment risk in the meantime to target those high-level of investment returns.



    So, this could translate into rather that 4 million pound a year for five years that could translate into, say, 2 million pounds a year for 10 years (inaudible). So, there's not a (reduction) of the (inaudible) required and (inaudible) turn out longer.



    And what (inaudible) is that by the time you (inaudible) to years eight, nine, 10 of that (inaudible) plan, actually, the increased level of – increase the investment returns have been achieved and that means that the additional contributions aren’t actual required by the time you get there.



    Again, this is (inaudible) on to what the objectives are is easy to reduce cash in the short-term or is it to try and reduce risk or is it – where do you sit on that spectrum. But I think just part of it, this – these continued assets are really – will become more and more part of the (valuation) discussions that we'll be going in to.



    (Thinking around the) next slide, it's just looking at how that might play out in the scheme that tend to operate within the (inaudible). And (inaudible) of schemes, (inaudible) of their own pension arrangements. So, that could be (inaudible) pension trustee of our own trust (inaudible) or it could be a standalone section within a wider (inaudible) such as pensions (inaudible) solutions.



    (And then), these are absolutely the kind of schemes and sponsors and these situations are absolutely using these kinds of instruments, these kinds of – of having these kinds of discussions, we have helped clients put them in place, one in particular where we were able to put together a package which was contributions by themselves would not be acceptable to the trustees but because they came with a form of security to provide. In addition, that gave the trustees the comfort that they were able to agree to it.



    That particular case, that was (inaudible) of the property rather than (inaudible) of credit (inaudible) the logic and the idea is exactly the same.



    So, that’s sponsors with their own pension scheme. SHPS or Social Housing Pension Scheme is maybe a big difference. That’s a very large scheme. It's – and the key there is it's set up on a non-segregated basis. So, that means that there is a single part of assets. There is a single part of money where contributions have paid into it and benefits are paid out.



    Now, that means thinking of how these contingent assets could work in practice, I think the key things that they give, the key things that they provide to trustees and sponsors is really flexiblility. It's the ability to do something different because this additional protection has been put in place.



    And within this structure at the moment, I mean, it's quite hard to see how that flexibility might manifest itself. Really, it's a set of – on a non-segregated basis, with the employers or acting in broadly the same way.



    So, I think at the moment, it's quite difficult to see how that would work. I think one thing it is worth thinking about, though, is we do have a valuation of SHPS coming up with an effective date of this September, 30th of September 2020 and I think the indications are, at the moment, it's not going to be a particularly nice valuation.



    I think the deficit at the moment is likely – at the moment, we were expecting the deficit to be considerably larger than it was expected to be of the last valuation and that’s, together with the direction of the travel – direction of travel from a pension speculator, may well lead to increased requirements for deficit contributions.



    So, that may mean that given those big increases, SHPS does need to maybe start to be a bit more innovative, start to look at the different structures and see if they're all (laced) in which some of these mechanisms can be incorporated. So, I think that’s a watch list space.



    The final scheme that’s mainly – that many associations operate within is the local government pension scheme or the LGPS. And there, these contingent assets really do have a part to play. Within the LGPS, by default, when your section no longer has any actively contributing members.



    So, members-earning benefits. Then evaluation is carried out using very prudent low-risk assumptions and I think there's a deficit. That deficit is required to be paid as a lump sum (inaudible) contribution and that can be millions, tens of millions of pounds. It can be a significant amount.



    It can be possible to agree alternative would be able to (inaudible) lots of experience of that, different funds had, different views and have different positions on these agreements.



    But I think the key is that often, some for additional securities is required. And if you're not going to make the large one-off payment upfront, if it is going to be pushed into the future, then the funds will typically want some form of additional security which often will take the form of one of these assets that we've been looking at.



    So, that’s something we've seen a lot of in the past. Maybe something that’s starting to come -become a bit more common, really came out of the – the 2019 valuation of the LGPS which was only finalized March 2020. So, a month or two ago.



    What we're saying is more funds (inaudible) the view that if your section of the LGPS is closed to new entrants, then that effectively means you have a closed group and you're not starting anybody to it. Then they are taking the view that you should be funding now on low risk assumptions.



    And I think that their logic is that if you got a closed group of members and you're not having anybody into it, then sooner or later, you will no longer have any active members in that section and I think logically, that makes sense. It's inevitable that sooner or later everybody will have retired.



    And therefore, if that’s the position you're going to end up, you should start to fund on these low-risk assumptions now. Also, that’s a handful of funds we're doing (back) in 2016, it seems a lot more common to 2019 and it can have a really big impact.



    So, both on ongoing contribution rates and also deficit contributions, both – the one clients, we have both – the initial proposal from the fund was actually about a 10-fold increase in their overall contributions, completely unaffordable. But we were able to negotiate an alternative package and part of the things that you can negotiate with are these contingent assets are providing the additional security.



    So, that’s just quite – just a quick run-through how they might work from (inaudible) perspective and how they operate or can operate within the different pension schemes typically used in the sector.



    And so, I'll hand back over to Dave for reflections.


    David Cassidy: Thanks very much, Mike. Appreciate those presentations. Mike's presentation may, for some, have been a bit crackly. So, if that was so, apologies, we were – we're trying to correct it during the call. Luckily, Mike's slides were excellent and informative and we do have a better time for some Q&A.



    But thank you. Very informative and focus content there on addressing possible deferrals in the current environment. But also, the perennial issue of managing your scheme deficits.



    And as Mike alluded to at the end of his presentation, an issue which I expect will become more pertinent as we move through the current environment of investment volatility.



    So, look, we are going to open up the lines for Q&A and operator will do that in a moment. Before we do that, I'm just going to ask Barry Madden to introduce himself and say out a few words, just in response to our formal presentation and Barclay's position as being able to be effective in the area of contingent assets.



    Welcome, Barry.


    Barry Madden: Thank you, David.



    Good morning, everybody. In terms of final observations, I'm conscious of time and I do appreciate there may be a number of questions on the line. So, I'd like to spend just a couple of minutes reflecting on this (entertainment) this morning of being liquidity preservation which clearly is particularly irrelevant at the moment and (inaudible) agnostic within the wider corporate franchise, Barclays are currently engaged from a number of our clients across multiple factors in respect of exploring solutions which enable cash out to be replaced with alternative instruments in the form of bank contingent assets.



    Hanna referred to this area broadly as banking solutions and mentioned concepts which is letters of credit, bank guarantees. The primary motivation that we're seeing within our client base, client sector, we're utilizing such solutions as maintaining cash reserves and retaining debt levels for alternative uses or in case of need, wider than COVID-19, we're seeing clients utilizing bank contingent assets from a cost deficiency and solution arbitrage perspective.



    From a bank's perspective, contingent asset through light in terms of capital consumption when confirmed with funded instruments. Potentially resulting in a more favorable pricing levels for clients, albeit it's important to emphasize that this is contingent on the underlying collateral tenor and (client) covenant.



    It's also important to highlight that as an unfunded instrument, bank contingent asset can now detract either an internal or external cost of funds element. Essentially, the (inaudible) margin reflect the default risk of the applicant.



    The social housing fraternities characterize the strong covenants given their considerable asset (bills) and this can result an attractive pricing levels for bank contingent asset structures. In order to be efficient, we pledged securities and we've also seen a number of social housing clients to look to accommodate new contingent asset structures within their existing facilities and this is certainly something that we're willing to explore.



    The use of contingent assets within the pension spaces are a well-trodden path and we've have a number of social housing pension guarantees in our books. Within the wider concept of liquidity preservation, continuing to remain relevant in the medium term, Barclays are here and eager to support (use of our) clients going forward.

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