The background

We have been retained covenant advisers to the trustees for a number of years. Over this time we have developed a comprehensive covenant monitoring program which assists the trustees in understanding how the strength of the employer is changing over time, in line with changes to the scheme’s funding position and investment performance.

We recently provided a more comprehensive covenant assessment for the purpose of the scheme’s 2017 triennial valuation, which included consideration of employer forecasts and of the longer term intentions of its owner, a private equity firm.

Our solution

Through this work we uncovered that the employer was to begin paying significant dividends following a period where none had been paid since the private equity firm bought the business a number of years earlier.

We considered recent regulatory guidance regarding both materially detrimental events and the requirement for schemes to be treated equitably with other stakeholders.

Because the scheme ranked behind secured debt and would have expected a relatively small insolvency realisation in any case, there were strong arguments to say that the dividends would not be detrimental to the 'exit' covenant.  However, we assisted the trustees in negotiating a shorter recovery plan than would otherwise have been the case, on the basis that this was required to ensure fairness compared to what the shareholder was taking out of the business.

This has provided the trustees with a better view of how the covenant is evolving over time relative to key measures of funding and investment risk, enabling timely actions to be taken when necessary to protect the security of members’ benefits.