Bank loans forbid firms from plugging pension deficits

The new terms are being initiated by a number of banks which say they will not refinance corporates with particularly large pension liabilities unless they agree not to use the money for paying off deficits.

PW previously reported UK firms going bust as a result of banks being reluctant to refinance corporates with large pension liabilities.

Travel, consumer and retail businesses have been pinpointed as the most likely sectors to be entering into such deals because they are said to be the most likely to default on their repayments.

But lawyers have suggested there could be a question mark over the contracts, because the new loans could restrict the ability of sponsors to pay people their full pensions.

Martine Trouard-Riolle, director at Independent Trustee Services, questioned whether restricting sponsors from paying off their liabilities would be a good idea.

“Growing liabilities might only make it even more difficult for corporates to secure refinancing loans the next time around, although the rationale behind this seems to be using all resources available to strengthen the sponsor,” she said.

David Collinson, head of business origination at Pension Corporation, said he was not surprised, warning trustees “need to take a longer view of refinancing”.

He added he expects the growth of at least 10% of the FTSE 350 to be stunted as a result of sponsors’ commitment to pension fund liabilities.

Despite these clauses, Pension Corporation research showed 37% of trustees expect to broker an increase in sponsor contributions, with 20% seeking increased payments of more than 10%.

The banks’ approach to deficit reduction also suggests an inconsistent approach to pensions, as they appear to recognise the danger deficits pose to sponsors.

In February, PW revealed clauses are also being inserted into loans forbidding borrowers from increasing their liabilities through acquisition.