Contingency planning in the context of COVID-19
Contingency planning has been a key component of regulatory guidance for several years now and the COVID-19 crisis has further emphasised its value. But what does it include and what should trustees be doing?
We follow a broad four step plan to contingency planning that can help trustees (or even companies) establish appropriate contingency plans for these unprecedented times.
1: Understand and document – where are we now?
In order to plan for the unexpected, it is critical that we know where we are now – this means having a clear understanding of six factors:
- Data – where is the data, who processes it, how accurate is it?
- Governance – trustee details, sub-committees, quorums, conflicts policy
- Legal – deed and rules, powers, impact of company insolvency
- Covenant – legal obligation, resilience to shocks, creditor priorities
- Investment – volatility to markets, hedging, ease of disinvestment
- Funding – funding level on all bases, flexibilities in prudence
Such factors are the starting point of contingency planning. Without a solid understanding of ‘what happens when….’ and ‘what can we do in response to….’ it’s impossible to plan and prepare. Speaking of which….
2: Plan and prepare
A full contingency plan should address both long-term factors (those impacting the journey plan over time) and short-term events. Whilst it’s probable that the COVID-19 crisis will impact both, short-term scenarios are likely to be more critical to consider in the current environment.
Trustees will need to be able to act quickly and independently and understanding governance is a critical component of this. To aid this, the short-term appointment of a professional trustee may be appropriate.
Here are three scenarios trustees should be planning for:
A. Requests from the sponsor to defer contributions
We recently ran a webinar focusing on requests from sponsors to defer contributions and what to consider. Watch the webinar here.
But in summary trustees need to consider a few main points:How critical are contributions for the scheme?
- How critical is the deferral to the company?
- How are other stakeholders being treated?
- How appropriate is the repayment timeframe?
- What protections can be put in place?
B. Material weakening of covenant and possible insolvency
Many businesses are struggling and some will be taking advantage of market flexibilities to defer payments or increasing borrowing to support operations. In many cases, employer covenants will be worsening, and a few companies will become insolvent – we’ve already seen it with retailers such as Debenhams, Cath Kidston and Laura Ashley.
Trustees’ focus should be on protecting member benefits (e.g. by seeking asset security or preventing subordination to other creditors), ensuring lines of communication with the sponsor are at least equivalent to those provided to other creditors, and potentially, preparing for insolvency.
Watch the webinar Contingency Planning Part 1: Getting match fit here.
C. Major reorganisation / restructuring / M&A
Coming out of the Covid-19 crisis many companies may look to restructure their finances or rationalise operations. Depressed share prices may also pave the way for M&A activity, particularly from private equity with large war-chests.
Trustees need to be prepared for such situations, for example by establishing clear information sharing protocols and having an appropriate mix of skills on the trustee board and advisory team.
Once scenarios have been considered and plans developed, it is vital to monitor performance with particular focus on the highest impact risks identified. From a covenant perspective, the frequency of monitoring should depend on the nature of the risks identified.
Schemes, sponsors and the regulatory environment aren’t static, so contingency plans must be dynamic. Plans should be constantly refined and improved as the scheme matures, the covenant changes and the regulatory environment evolves. The triennial valuation process offers a perfect opportunity to revisit plans on a regular basis, but trustees should not be afraid to revisit sooner as situations unfold.
Written by Luke Hartley
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