Viability Statements –
a time and cost saver for IRM
8 July 2016
The requirement for the directors of listed companies to make a Viability Statement in their annual accounts has come at a very opportune time for trustees grappling with the Pension Regulator’s recent guidance on Integrated Risk Management (IRM).
Indeed, much of the thought on key covenant risks and downside scenario analysis may have already been undertaken.
The purpose of a Viability Statement is for directors to establish and disclose a longer term view of business sustainability. This goes beyond the current requirements on going concern, and marries up very well with the issues which trustees need to consider when assessing and measuring covenant risks.
If management is prepared to share its analysis, the underlying work around the Viability Statement – which may include risk identification, qualitative analysis, scenario planning, stress testing and reverse stress testing – can give a serious head start for trustees in moving the IRM process forwards.
Such sharing of information seems like a real win-win, and a collaborative approach should assist trustees when considering how scheme related risks may interact with the fortunes of the business. For example, management could be asked to run low interest and high inflation scenarios through their Viability Statement models to show the expected impact on trading, cash flow and balance sheet performance.
The requirement for a Viability Statement applies to UK listed companies with an accounting period beginning on or after 1 October 2014, therefore the underlying analysis work should have been undertaken for all 31 December 2015 annual reports.
Unfortunately, the same level of disclosure is not currently required for private UK businesses or where parent companies are listed overseas. For employers where Viability Statements are not prepared the key is to ensure that trustee IRM analysis remains proportional and relevant, and engagement with sponsors will certainly help.