“Mothballing” – A Guide for Trustees

James Bond is often the hero of the hour, but in a pandemic plotline that would have stretched most authors’ imaginations, he was not able to save cinema chain Cineworld that last week announced that it was to let its 5,500 staff go and mothball its 127 cinemas until April 2021.

2020 has certainly been the year no one planned, and businesses are having to react in imaginative and creative ways. How can and should trustees help in these circumstances, and can trustees mothball the pension scheme too?

It is helpful to recognise that the sponsor proposing to mothball its business is doing its best to ensure the long-term survival of that business. This is exactly what the trustees want too. The more sponsors and trustees can engage collaboratively with each other, the easier it will be for each to help the other.

Businesses and pension trustees will first ask whether the right people are on the trustee board and whether they are they doing the right work?

Trustees who are employees may be made redundant and cannot, therefore, continue as trustees. Those employee trustees who remain employed might be best using their time to manage the business through one of the most challenging times it is likely to ever seen and not be distracted by running the pension scheme. To ensure a fully functioning trustee board, employers could consider a sole corporate professional trustee, who can manage BAU trustee work and respond to complicated covenant issues, without using up the valuable time of employees still left in the business.

Trustees will need to think carefully about what work is undertaken. Some projects can be postponed, but much scheme work is cyclical, member driven or fundamental to good governance and will need to continue.

Trustees should consider if expenses can come out of the scheme. Ultimately the sponsor will pay, but if cash is saved in the short term, it might help the sponsor to survive.

The big question is whether the sponsor needs to continue to pay cash contributions?
The sponsor will need the trustees to agree what happens if it can’t pay and it is best if the sponsor engages fully and transparently with the trustees. If the sponsor proposes an amendment to the schedule of contributions, trustees may need to weigh up continuing to receive cash now, which may risk pulling the whole business down, versus accepting a deferral of contributions until the business is up and running again.

The Pensions Regulator says it will be reasonable about reductions or suspensions in deficit repair contributions, if (amongst other things):

• They can see the need for it.
• A plan is made for deferred payments to be caught up.
• A plan is agreed for mitigating any detriment if at all possible.
• The pension scheme is treated equitably compared to other creditors. This is key.
• Where a suspension or reduction of contributions is agreed as part of a refinancing from lenders or significant creditors, trustees understand the terms and consider seeking recourse to security/valuable assets, for example, with the deferred sums being given the same protections as the new money lending.
• There is enhanced monitoring of the sponsor’s and wider corporate group’s trading and liquidity position, so regular forward looking and actual financial information to identify changes in circumstances of the sponsor and the position of its funders.

Trustees will want to consider de-risking to maintain the funding level so there are no surprises whilst the business is mothballed. The Trustees will also want to check whether a section 75 debt is triggered by redundancy of active members or the redeployment of employees within the group. In addition, does the pension scheme benefit from any security arrangements which pay out on the mothballing? It will help the sponsor to know the answer to these questions when they consider whether mothballing is a viable option.

It isn’t, of course, possible to mothball a pension scheme, but once the initial flurry of activity is over, the trustees will be able to run the scheme efficiently for the (hopefully short) time until the business recovers.

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