Pensions Conference 2011. Review of Workshop C2: A new look at employer covenant
| Speaker: | Richard Farr, BDO LLP |
| Reviewed by: | Kerry Oakes |
The key message from this workshop was that once insolvency happens, a buyout is triggered and the actuary loses all of their powers. Mitigation needs to be put in place before this happens.
Although the session touched on familiar statements (such as the Scheme should act like a secured creditor, and that the strength of the covenant should be the driver for the acceptable level of pensions risk) the main focus was on how to make a covenant review something that is of real value rather than a box-ticking exercise. Key to this is the need to link covenant risk with actuarial risk in a meaningful way. Showing how the value placed on the Technical Provisions will change as the covenant changes gives both sides the information they need to start negotiating.
BDO’s method is to give a score based on three main elements:
- Position – as assessed by an estimated insolvency analysis
- Prospects – based on employer forecasts and business plans
- Power –t he Trustees’ past success in negotiating contributions from the Company
Once parties understand which is of most importance to them, they can seek to improve their position in these areas by putting in place frameworks or security designed to lessen the impact of insolvency.
Ultimately, if both sides can be open about their objectives then they can act together to ensure that the scheme would be in the best possible position on insolvency.