Punter Southall urges heightened vigilance on employer covenants as corporate restructurings are set to rise

22 May, 2012

A rise in corporate restructuring due to challenging economic conditions will mean employers and trustees must be more vigilant in managing the employer covenant available to their pension scheme, according to the latest Insight report from Punter Southall Transaction Services (“PSTS”).


With the level of corporate defaults expected to rise this year, an increasing number of businesses are set to undertake financial or operational restructuring to avoid insolvency, financial distress or significant deterioration in trading performance.


Premier Foods, TUI Travel, JJB, Logica, and Punch Tavern are just a few of those companies that have all undergone some form of restructuring recently. Companies with defined benefit schemes may be particularly vulnerable to material changes in the strength of the employer covenant, something that both trustees and employers need to understand fully.


PSTS’s Lorant Porkolab (pictured), who leads the covenant advisory team at Punter Southall, is urging decision-makers to make sure they consider the impact. He said: “Many restructurings affect the legal shape of the business. It is critical for trustees to understand where this leaves the pension scheme and its sponsoring employer.


“Restructuring can involve moving key assets out of the sponsoring employer and weaken the covenant support available to the pension scheme. This can also happen even if the legal position remains the same.


“Both employers and trustees should prepare to work together on mitigation to put the scheme back in the same place as it was before the restructuring. It’s important that everyone is pragmatic and commercial throughout the process. Benefits from properly restructuring a business will ultimately bolster the covenant support available for the pension scheme.”


Whilst there is no formal definition, corporate restructurings involve the reorganisation of the legal, operational, financial or ownership structure of a company with the aim of creating value for its stakeholders.


Further details on how corporate restructurings may affect the employer covenant can be found in our latest Insight report entitled “Employer covenant and corporate restructurings”. This follows our Insight from 2011 that covered the potential covenant implications of refinancing activities and described the key issues for both trustees and sponsoring employers.


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