Dalriada Trustees on the extended furlough scheme and covenants

11 Nov 2020

With the Job Support Scheme replacing the Coronavirus Job Retention Scheme (“CJRS”) from 1 November, Sarah Ballantyne, a professional trustee at Dalriada Trustees analyses what the future might look like for sponsors and what actions trustees should take.

A lot can happen in 10 days, however, the question how the introduction of the Job Support scheme could affect covenants is still valid. Businesses to date have largely shown resilience to weather economic pressures caused by Covid-19.

This has to a large extent been aided by Government support including the introduction of CJRS which has now extended to the end of March 2021, statutory demands and winding up petitions extended until 31 Dec 2020 to protect companies from aggressive creditor action and the deferral of VAT liabilities payable between March and June 2020 extended to financial year 2021/2022. 

The data on corporate insolvencies suggests that the Government’s strategy to date to support businesses has largely been successful. Insolvency events in corporates are tracking below historic norms. Corporate insolvencies increased to 926 in September 2020 compared to August’s figure of 784, but remained well below the September 2019 figure of 1,513.  

But is this representative of the health of corporates and the economy? The answer is no, particularly in view of some of the measures introduced by the Government being deferrals not waivers. Liabilities in time will need to be settled. Businesses could still be facing a cliff edge when government support is finally withdrawn, with the potential now for this to coincide with the uncertainty caused by a hard Brexit. The expectation amongst restructuring professionals is that a sharp rise in corporate restructurings will come; it’s a matter of when, rather than if. 

So what actions can trustees take to protect pension schemes?  

Well, the starting point is information, information, information. However, the more timely, targeted and relevant that information is, the better. The Pensions Regulator has been encouraging trustees to monitor the financial position and prospects of a pension scheme’s sponsor for many years now.

Many trustee boards have used the uncertainties caused by Covid-19 to request further and more regular financial information from their sponsor, whether easements on Deficit Repair Contributions were requested or not.

This sharing of information should be continued and used to monitor and prepare for any reduction in covenant strength. Engaging in early and collaborative discussions with the employer on its financial outlook, trading and liquidity position is key. As is understanding the position being taken by a sponsors lenders, and credit insurers.   Preparation, quality advice and trustee experience can all improve member outcomes. 

Agreeing a monitoring framework in normal times will also serve in times of stress. We are clearly not in “normal times” but the earlier issues are identified and addressed, the greater the prospect of improving the scheme outcome in times of corporate stress before they become distress.  

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