UK - Trustees face a "real challenge" when attempting to understand new regulations governing employer debt, the National Association of Pension Funds (NAPF) has warned.

Proposed changes to debt restructuring regulations stipulated in Section 75 of the Pensions Act and creating Flexible Appointment Arrangements (FAAs) - on which the Department for Work and Pensions (DWP) recently consulted - will see longer grace periods granted to sponsors for funding debt, as well as the period in which trustees have time to prepare for any debt restructuring doubled.

The new regulations would replace those governing General Easement, which demanded that any schemes involved be part of the same corporate group and therefore only of use during company restructurings.

In its submission, the NAPF noted that FAAs will place significant responsibility on trustees, as they will be in a position to block an FAA if need be.

"Although this is a welcome and important safeguard," it said, noting that trustees would be best placed to judge the strength of the employer covenant, "the DWP should recognise that this will present a significant challenge for trustees, and it will be important they have good guidance to help them through the process."

It further estimated that there would be significant demand for FAAs, at least initially, disagreeing with the DWP's prediction that only 2% of existing defined benefit schemes would take advantage of the new regulation.
 
Other changes, which are expected to come into force this October, include an extended grace period before FAAs are triggered.  Under current regulation, if a sponsoring employer ceases to employ active scheme members for longer than 12 months, Section 75 would be triggered.

The DWP has instead suggested that this period could be extended to 36 months, with the extension granted by trustees. An employer would also be required to give trustees two months notice if it planned to take advantage of the grace period, doubling the time frame.

Meanwhile, consultancy Redington has urged UK pension funds to take advantage of recent market upheaval and increase their level of inflation hedging.

Robert Gardner, co-chief executive, said it was the right time for schemes to take advantage of break-even inflation (BEI).

"Trustees who have set in place a robust game plan before market turbulence arises are best placed to take advantage of any opportunities that may arise," he said, referring to schemes already employing dynamic de-risking.

"For example," he added, "being able to hedge inflation risk at below 3.50%, a key level for many pension schemes."

He pointed out that 30-year UK BEI, as calculated by 30-year inflation-linked gilts, were currently trading at 3.4% and had fallen by as much as 30 basis points in the past few weeks.

"Previous sharp falls in breakeven inflation rates have been short-lived, lasting for days rather than months," he said.

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