News – One in six pension schemes report long-term covenant damage

News – One in six pension schemes report long-term covenant damage

Only one in six pension schemes (16%) surveyed* by Willis Towers Watson said the coronavirus pandemic had weakened their sponsoring employer’s ability to stand behind the scheme in the long term. One in three (35%) reported a negative short-term impact on the employer covenant.  

Graham McLean, head of funding at Willis Towers Watson, said: “These numbers are less gloomy than might have been feared, with most schemes believing they have got through the first phase of the pandemic with the employer covenant more or less intact. The Pensions Regulator also said last week that fewer employers had deferred deficit contributions in response to severe cash constraints than had been expected.

“But a meaningful proportion of schemes fear that, although the economic consequences of the coronavirus have not been fatal for their sponsor, they have done lasting damage to its financial health. Schemes whose covenant is looking shakier may re-evaluate their strategies for ensuring that members’ benefits get paid. Some who expected to buy out benefits with an insurer or run the scheme off themselves may explore whether to ‘cash in the covenant’ while they still can and move to a commercial consolidator.”

While 64% of trustees thought they would reach their current long-term objective in no more than nine years, only 28% of corporates thought this likely.

Graham McLean said: “This disparity should not reflect different views on how funding positions have been affected by market movements: widespread use of tracking tools leaves little room for surprises.  It may instead signal that trustees and corporates will enter the next round of negotiations with starting positions that are further apart than they have been for many years. Creative solutions will have to be explored if they are to find common ground.”

28% of pension schemes participating in the Willis Towers Watson research expected deficit contributions to rise following their next funding agreement. Meanwhile, more than half (54%) thought the new approach to regulating funding agreements being prepared by the Pensions Regulator will ultimately cause employers to pay more.

Graham McLean said: “The Government has never said clearly that it intends the new funding regime to increase cash demands on employers in aggregate. The Regulator’s indicative blueprint would make many employers pay more if they want to go down the ‘Fast Track’ route. There will, though, be another consultation before details such as maximum recovery plan lengths are firmed up, and the Regulator has said this will reflect economic circumstances. The Regulator’s usual balancing act may have got harder than ever, as it tries to shore up members’ benefits without impeding business recovery.”

Both trustees (72%) and corporate respondents (69%) agreed that schemes should only have to demonstrate that a bespoke agreement is suitable and complies with legislation, not that it is equivalent to a prescribed standard. This view is at odds with the Regulator’s proposal, under which ‘Bespoke’ agreements would have to be as strong as ‘Fast Track’ overall, or have any additional risks mitigated, except where employers cannot afford ‘Fast Track’ payments. 

Graham McLean said: “This year’s events underline how hard it is to set robust ‘Fast Track’ criteria that do not need updating almost continuously. Reducing the evaluation of funding agreements to a comparison against this yardstick would also be at odds with the unique, nuanced and multidimensional nature of each scheme’s circumstances.” 

Author: Editorial Team

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