The trustees and the sponsor worked collaboratively to swiftly agree a solution in the event of immediate liquidity concerns.

The background

The trustees of a c£100m scheme had a sponsor which was a people-based business and had seen the orders for its services plummet during Covid-19 lockdowns, severely pressuring cash flow. At the last valuation, the covenant was assessed as “Weak”.

After taking advice (which took account of Covid-19 guidance issued by The Pensions Regulator (“TPR”)), the trustees agreed to a short-term deferral of pension contributions. But, after continuing to face liquidity pressure, the sponsor subsequently requested a more substantial extension, requiring much harder thinking by the trustees.

Our solution

Our covenant work focused on assessing forecasts over the requested deferral period under a range of scenarios, advising on whether the business could stay afloat and restart contributions further down the line, whilst also highlighting the potential outcome to the scheme if the business did go bust.

In addition, we also considered the sponsor’s longer-term projected trends to help ascertain whether the trading pressures were likely short-term (eg due to Covid-19) or highlighted more substantial concerns with the sponsor’s underlying business.

The results

Our advice helped the trustees conclude that, on balance, the risks of agreeing the contribution deferral outweighed the risks of refusing.

As part of this agreement, we also assisted in negotiating improvements to the security packages, incorporating a contingent contribution mechanism to allow for the scheme to obtain value if the sponsor performed favourably, compared to its forecasts.

Finally, we worked with the sponsor to develop a proportionate approach to monitor the covenant on a monthly basis whilst the deferral was in place, to allow for the trustees to make timely decisions in the event of heightened liquidity pressure.