Affordability reviews

With pension deficits remaining at historically high levels, it is important for trustees to understand and critically evaluate the capacity of their employer(s) to make deficit repair contributions as part of their recovery plan.

The assessment of affordability can be complex and there is no “one size fits all” approach to assessing the level of contributions that an employer should be making to its scheme. The answer to the question of “what is appropriate?” may depend on a number of factors including the funding position and risk volatility of the scheme, the competing cash-flow demands of the employer, and the treatment of other stakeholders.

An assessment of affordability should be grounded in analysis of the forward-looking cash-flow projections for the business. It is important to understand the discretionary uses of cash generation as well as the extent to which this cash may be “allocated” to other financial stakeholders of the employer, including debt providers or shareholders.

As a firm with a corporate finance heritage, we focus our employer covenant analysis on forward looking cash flows and intra-stakeholder dynamics. We pride ourselves on helping our clients to build robust and balanced viewpoints on the appropriate level of contributions, which consider the particular circumstances of both the scheme and the employer, ensuring that the scheme is being treated equitably.

 

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