PLSA AC 2020: Quarterly covenant reviews recommended for some schemes

Some pension schemes should be looking to do six-monthly or even quarterly evaluations of employer covenants, according to Lincoln Pensions managing director, Matthew Harrison.

Harrison, who was responding to a question at the PLSA Annual Conference, commented that assessing covenants had been a “real struggle” over the summer due to a lack of forecasts amid the economic turmoil caused by Covid-19.

He noted that this was now possible again, but warned that many forecasts failed to take a second wave into account and were displaying U-shaped curves, meaning that covenant advisors need to “critically assess” and evaluate what second waves will look like for each employer.

Travers Smith partner and head of pensions sector group, Daniel Gerring, added that the “most important thing” for covenant advisers was to try and “foster better relationships with the sponsor” in order to improve sharing of information in recognition of a commonality of interest.

Gerring made the seriousness of the matter clear, stating that he had examples among his client base of “distressed or very near distressed situations”.

Lincoln Pensions managing director, Matthew Harrison, said: “2020 has been the most tumultuous year in my experience as an employer covenant adviser. The last six months have been constant discussion about Covid-19 and the impact of the pandemic.

“Many businesses’ revenue has been reduced to zero for periods of time, while revenue has been substantially hit for almost all businesses. Operational challenges and the way that consumers interact with businesses has changed.”

He noted that most sponsors would feel the impact of Covid-19 most acutely in the short term, but the shockwaves would continue into the medium term as entire sectors struggle to adjust to new norms and existing journey plans become less realistic.

He added that the government stepping in had prevented “inevitable swathes of insolvency” and “saved a lot of jobs”.

Harrison: “Covid-19 is an example of the kind of existential risk that the employer covenant underwrites and we shouldn’t forget this. It’s unpredictable and this picture would have looked very different in 2008 in terms of the expected recovery times for different sectors.

“We’re feeling this very differently from employer to employer, and for trustees to understand that specific position is vital.”

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