From the blog: The Pensions Regulator’s assertion that “the strength of the employer covenant can change materially over a short period of time” has once again been proved correct by the case of Carillion.
The company’s share price tumbled 47 per cent earlier this month, following similar falls in July.
During this turbulent time the trustees of Carillion’s five main UK defined benefit schemes have been working on the triennial valuations due as at December 31 2016.
The company’s share price tumbled 47 per cent earlier this month, following similar falls in July. The subsequent announcement of new credit facilities and an ongoing disposal programme were considered by investors to offer only a temporary lifeline to the group, and it is now thought that a debt-for-equity swap is on the cards.
The case should act as a warning to trustees that an employer’s ability to provide support to the pension scheme can change rapidly
During this turbulent time the trustees of Carillion’s five main UK defined benefit schemes have been working on the triennial valuations due as at December 31 2016.
Under the previous recovery plan, it was expected deficit recovery contributions of £50m would be paid in the 2017 financial year. However, the trustees have since agreed to defer these, potentially until January 2019.
Cases like this prove why it’s imperative for trustees to carefully identify and understand the key risks affecting the financial support available to their scheme – and develop a bespoke framework for monitoring and managing these risks. In line with the regulator’s guidance, trustees should also set up contingency plans so they can react promptly to any weakening in the support provided.
By actively monitoring the employer covenant, trustees will be better positioned at the negotiating table if it begins to deteriorate.
Carillion’s trustees are likely to have been closely involved with the recent refinancing, working hard to secure the best possible outcome for the pension schemes, as unsecured creditors, in any further recapitalisation of the business.
However, it remains the case that persuading trustees of the value of regularly monitoring the employer covenant can be challenging. It’s true that there are limited situations where adopting a proportionate approach means in-depth, regular monitoring is not appropriate.
Trustees should be aware though that this is only the case when they have established a good, ongoing understanding of their employer covenant risks and the unique circumstances of their scheme and sponsor.
The case of Carillion should act as a warning to trustees that an employer’s ability to provide support to the pension scheme can change rapidly. Unless you actively monitor and engage with the covenant, members’ benefits are likely being put at risk.
Jacqui Woodward is a senior consultant at Punter Southall
