Employer distress – the signs to look out for in 2021

As we near the end of 2020, I’m sure we can all agree that it won’t be missed. As vaccination programmes begin to be rolled out (in some countries at least) a light is appearing at the end of this gloomy tunnel and attention will inevitably turn from managing the crisis to managing its aftermath.

Government support will be wound down (and may need to be paid for, depending on which economist you speak to) and some companies will need to address the longer-term impact of the crisis.

With this in mind, TPR’s last guidance [footnote to weblink] is helpful for trustees to make sure that their pension scheme is treated fairly should a corporate distress scenario arise in 2021.

But what signs should trustees be on the look out for that their covenant may be at risk?

Of course the signs (and proof points of recovery) will vary from company to company, but here are a few to put on the radar:

  1. Prolonged pandemic disruption: the roll out of vaccines will take time, especially before programmes are effective on a global basis. Until then companies will have to continue to manage varying degrees of disruption, especially those reliant on movements of people (e.g. tourism and travel). Trustees should continue to monitor the actions sponsors are taking to weather this crisis, and look for challenges raising financing or more onerous credit terms from suppliers;
  2. Refinancing risks: while companies received government support to facilitate lending during the peak of the crisis, these facilities may need to be refinanced without this support. Trustees should be alert to more onerous refinancing arrangements which could include higher interest rates and security being provided to lenders to the detriment of the covenant; and
  3. Brexit: amongst all the understandable focus on the pandemic, Brexit discussions are reaching their denouement with uncertainty on future trade terms between the UK and the EU. Sponsors with significant cross-border trade risk increased administrative costs, operational disruption and new tariff arrangements. For some, this could impact both the affordability of the sponsor but, more generally, the scope of operations in the UK, so understanding the impact of Brexit on the sponsor should be a key priority for trustees

It won’t be easy, but spotting these signs early and taking actions to protect the scheme will help to manage the risks to members. Good riddance to 2020! Roll on 2021…

 

Alex Beecraft, Director

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