The covenant is a critical factor in securing members’ benefits and making decisions regarding the scheme’s funding and investments. The financial strength of the employer determines the degree of prudence trustees should use in the valuation of the scheme’s liabilities and the level of risk that can be supported in the scheme’s investment strategy by the covenant.
- Triennial actuarial valuation
- Investment strategy review
- Apportionment arrangements
- Withdrawal arrangements
- Transfer value calculations
- Scheme merger or scheme closure
- Merger or acquisition
- Deterioration of trading performance
- Dividend payment or share buy-back
Corporate transactions can lead to changes in the employer’s corporate and capital structures, profitability, balance sheet strength or the priority order of creditors and therefore can also affect the strength of the covenant provided to the pension scheme. We help our clients throughout the transaction process by assessing the covenant implications of the transaction, liaising with other advisors, and negotiating proportionate mitigation if required.
In the actuarial valuation context, trustees will need to agree with sponsoring employers the level of prudence to be used in calculating the liabilities. This decision must be based on the strength of the employer covenant. We can assist in reviewing the strength of the covenant focusing on two key aspects: the scheme’s security position, and the affordability of contributions.
We can also establish a covenant monitoring framework and provide regular updates.
Asset backed funding arrangements
Asset backed funding (ABF) arrangements (which are also referred to as asset backed contribution (ABC) arrangements) have become an increasingly popular solution for pension scheme trustees and sponsoring employers looking to address funding deficits in an efficient manner. They typically involve ring fencing some of the employer’s assets (such as property, or whiskey and cheese in some of the more exotic cases) in a Scottish Limited Partnership which provides a regular income stream and some enhanced security to the pension scheme and allows the parties to agree to a significantly longer recovery plan. They are, however, complex solutions and both parties typically require specialist advice from experienced professionals. We at Punter Southall Transaction Services have been assisting our clients on ABF arrangements (including implementation and valuation) and are able to draw directly upon our actuarial, covenant, investment and corporate finance experience to provide integrated advice in this area.