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How our
covenant advice empowered a Trustee

Pensions & benefits

The background

Our client was the Trustee of a Scheme with assets of around £15m, they had been faced with a number of key challenges since the previous actuarial valuation. This included the deterioration of the sponsoring employers trading performance, corporate transactions (various disposals / acquisitions) and correspondence from the Pensions Regulator (“TPR”) regarding the strength of the employer covenant.

The Trustee did not feel comfortable completing the Scheme’s valuation without having further understanding of how the changes in the corporate structure impacted the strength of the covenant afforded to the Scheme. In addition, the Trustee was aware that the management team was considering further business disposals and was keen to agree in advance the portion of the proceeds that would be allocated to the Scheme in that potential scenario.

Lastly, given the Trustee’s receipt of a letter from TPR regarding its concerns, it was critical to ensure that the advice sought was provided in the context of the most recent TPR guidelines and assistance with responding to TPR from its covenant advisor was available.

We were appointed to assess the strength of the covenant for the valuation and support the Trustee in its negotiations with Management.

Our solution

We assessed the available information and concluded that the covenant had materially deteriorated over the intervening period.

Our analysis suggested that the Scheme was not being treated equitably with other stakeholders, particularly in relation to how the disposal proceeds from recent business disposals had been utilised. We considered that the proposed deficit repair contributions (“DRCs”) by the Company were not sufficient given the trading forecasts and Management’s proposed usages of free cash, and this supported a counter-proposal by the Trustee to seek double the amount proposed by the Company.

In addition, our assessment of the proposed contingency plan to share proceeds following any future business disposals assisted the Trustee in getting comfortable that member outcomes would be suitable protected in the event of future sales.

The results

Our advice presented a complex situation in an intuitive way to ensure that the Trustee was fully informed on all the material changes that impacted the covenant afforded to the Scheme, and gave them the tools to be able to build a case for the future covenant support they needed in light of the changes to the business.

How we can help

We help trustees understand and monitor the employer covenant.

We help clients identify, manage and monitor pensions risks in an integrated way.

We help trustees achieve their strategic goals, with solution-led, appropriate advice.

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