INFORMED PENSION SCHEME DECISIONS. Employer covenant reviews for pension scheme trustees

Transcription

1 INFORMED PENSION SCHEME DECISIONS Employer covenant reviews for pension scheme trustees

2 CONTENTS Trustees under pressure 3 The independent employer covenant review 4 Key events initiating an employer covenant review 5 Keeping it simple 6 Meeting trustees needs the benefits of our approach 7 About RSM 8 2

3 TRUSTEES UNDER PRESSURE Weakened company balance sheets and the financial constraints facing businesses over the last few years have had a major impact on the employer covenants supporting many pension schemes. RSM research indicates around 90per cent of defined benefit schemes are now in deficit and a high proportion of recovery plans are struggling to overcome growing scheme deficits. An assessment of an employer s financial position and its ability to fund scheme benefits is critical in assisting trustees to make informed funding and investment decisions. To secure member benefits and comply with the Pension Regulator s (tpr) guidelines, it is more important than ever for pension scheme trustees to regularly monitor the employer covenant. A changing pensions environment tpr has adopted an increasingly sympathetic tone towards employers, taking a more flexible attitude to the length of recovery plans and avoiding measures that may adversely impact on business growth. This has increased the range of potential outcomes, compounding the challenges faced by trustees and employers in reaching sensible funding agreements and in tackling scheme deficits. Concerns about affordability have led many companies to de-risk by reducing reliance on employer contributions, and to look for more creative approaches to scheme security and funding structures, such as the use of contingent assets and asset-backed guarantees. Against this backdrop, there is an increasing awareness of the need to manage pension risk. Many trustee boards require expert advice on the employer covenant, not just as part of the valuation cycle, but in response to major corporate events, scheme events, creative funding initiatives or on a general ongoing basis. 3

4 THE INDEPENDENT EMPLOYER COVENANT REVIEW A COMPELLING CASE There are a growing number of reasons why trustees might choose to commission an independent employer covenant review, including: Verify the employer promise assuring trustees that a scheme sponsor has the financial ability to meet its promise of funding a scheme. Satisfy tpr guidelines helping trustees to meet their obligations in forming an objective opinion of the employer s financial position and ability to fund scheme benefits. Review scheme-specific funding testing the employer s commercial strength and ability to meet their funding obligations, including negotiating a suitable recovery plan and improving scheme security. Assess corporate events and transactions (including clearance applications) evaluating the impact of corporate events/transactions on the strength of the employer covenant, together with potential sources of mitigation. Provide monitoring ongoing valuable assurance is crucial, particularly in volatile trading conditions when the strength of the covenant can deteriorate quickly and trustees need to be able to react accordingly. Alleviate potential conflicts of interest where trustees may be unable to carry out an objective review of the covenant. Reduce personal risk protect trustees from potential personal liability in the event that a sponsoring employer fails to meet their obligations. Provide PPF certification assist trustees with the annual certification of contingent asset guarantees. 4

5 KEY EVENTS INITIATING AN EMPLOYER COVENANT REVIEW Employer-related: Merger or acquisition Divestment Refinancing Restructuring Deteriorating trading performance Dividend payment or share buy-back Asset-backed funding proposals Scheme-related: Valuation cycle Investment strategy review Apportionment arrangements Withdrawal arrangements Transfer value calculations Scheme merger or closure 5

6 KEEPING IT SIMPLE Establishing a thorough understanding of the employer covenant from a profit and loss, balance sheet and cash flow perspective is key to RSM s approach and provides greater clarity in terms of affordability (including free cash flow and competing cash demands) and financial durability. We assess the strength of the employer covenant using the indicative five-point scale shown below. This approach has proven particularly effective when supporting trustees in the following areas: working with scheme actuaries and investment advisers to set up funding and investment risk parameters agreeing affordable contribution levels with employers and, in turn, setting a realistic deficit recovery period requesting and obtaining formal security or other contingent assets to strengthen the scheme s position establishing the level and focus of ongoing monitoring required, including triggers for remedial action eg making additional contributions or providing security. VIEW ON COVENANT Strong Positive Moderate Negative Weak INTERPRETATION Covenant factors viewed as strong: no major weaknesses identified. Risk of failure to honour scheme liabilities currently viewed as low. Covenant factors viewed as positive/favourable: no major weaknesses identified. Risk of failure to honour liabilities considered on the lower side. Covenant factors viewed as mixed. Potential for failure to meet liabilities, though probably not high risk or short term. Negative covenant factors outweigh positives: some significant weaknesses identified. Need for improvement/ change/restructuring if employer to honour liabilities. Covenant factors display major signs of weaknesses/distress. Failure to honour liabilities, or in the worst case, insolvency is a strong possibility. 6

7 MEETING TRUSTEES NEEDS THE BENEFITS OF OUR APPROACH RSM s highly respected Covenant Assessment Services (CAS) team specialises in valuation and transaction-driven covenant reviews for trustees of defined benefit pension schemes. BENEFITS TO TRUSTEES Specialist expertise Collaborative approach National and international coverage Bespoke reviews Breadth of experience An expert team offering a high level of partner involvement where necessary to develop robust commercial solutions, without over-engineering them. The experience to understand and work closely with trustees, employers and their other advisers, allowing frank and constructive discussion of the issues and clear agreement on the way forward. A substantial national team with the depth of resources to deliver covenant review services to schemes throughout the UK, with access to global expertise. Pragmatic and proportionate advice tailored in scope and depth to specific scheme circumstances, providing the appropriate level of service at a competitive price. Based on a long track record of advising trustees from multi-employer schemes with assets of over 1 billion to single employer schemes worth 10 million or less and an impressively broad client portfolio across a range of industries. 7

8 ABOUT RSM RSM is a leading independent firm of accountants and business advisers, providing an integrated range of services from audit, accountancy and tax advice to pensions, corporate finance and restructuring and recovery services. The core of our CAS team is drawn from the firm s Restructuring and Recovery practice, building on many years experience in advising stakeholders on corporate strength and viability. The CAS team is an integral part of RSM s highly respected National Pensions Group, which brings together our pensions expertise and services from across the firm. Nationally, RSM is one of the largest firms of auditors to occupational pension schemes and has been recognised as a leading specialist in this area for many years. rsmuk.com Key contacts Guy Mander Head of CAS, Birmingham T +44 (0) M +44 (0) guy.mander@rsmuk.com Bruce Mackay Partner, London T +44 (0) M +44 (0) bruce.mackay@rsmuk.com Matthew Wild Partner, London T +44 (0) M +44 (0) matthew.wild@rsmuk.com Willie Duncan Partner, Leeds T +44 (0) M +44 (0) willie.duncan@rsmuk.com Paul Dounis Partner, Edinburgh T +44 (0) M +44 (0) paul.dounis@rsmuk.com Mark Boughey Partner, Bristol T +44 (0) M +44 (0) mark.boughey@rsmuk.com John Gilmore Director, Birmingham T +44 (0) M +44 (0) john.gilmore@rsmuk.com Rhonda Gilmore Director, Birmingham T +44 (0) M +44 (0) rhonda.gilmore@rsmuk.com Guy Jackson Director, Guildford T +44 (0) M +44 (0) guy.jackson@rsmuk.com Richard Leach Director, Leeds T +44 (0) M +44 (0) richard.leach@rsmuk.com Mark Oldfield Director, London T +44 (0) M +44 (0) mark.oldfield@rsmuk.com Kevin Lamb Director, Edinburgh T +44 (0) kevin.lamb@rsmuk.com Kerry Boyes Associate Director, Guilford T +44 (0) kerry.boyes@rsmuk.com Dipesh Patel Manager, London T +44 (0) M +44 (0) dipesh.patel@rsmuk.com The UK group of companies and LLPs trading as RSM is a member of the RSM network. RSM is the trading name used by the members of the RSM network. Each member of the RSM network is an independent accounting and consulting firm each of which practises in its own right. The RSM network is not itself a separate legal entity of any description in any jurisdiction. The RSM network is administered by RSM International Limited, a company registered in England and Wales (company number ) whose registered office is at 11 Old Jewry, London EC2R 8DU. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug. RSM UK Consulting LLP, RSM Corporate Finance LLP, RSM Restructuring Advisory LLP, RSM Risk Assurance Services LLP, RSM Tax and Advisory Services LLP, RSM UK Audit LLP, RSM Employer Services Limited and RSM UK Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Baker Tilly Creditor Services LLP is authorised and regulated by the Financial Conduct Authority for credit-related regulated activities. RSM & Co (UK) Limited is authorised and regulated by the Financial Conduct Authority to conduct a range of investment business activities. Whilst every effort has been made to ensure accuracy, information contained in this communication may not be comprehensive and recipients should not act upon it without seeking professional advice RSM UK Group LLP, all rights reserved