Argyll Covenant is a specialist employer covenant adviser for trustees and employers. Our experienced team provides expert advice on all aspects of covenant including assessments, corporate transactions, restructurings and negotiations.

Understanding the ability of an employer to support its pension scheme is a central component of trustees’ risk management and has been a core theme of funding guidance published by the Pensions Regulator.

Argyll helps trustees understand the employer covenant.  The Regulator has made it clear that it expects trustees and employers to approach risk management in an integrated way and consider covenant, funding and investment risks together (Integrated Risk Management).

By working closely with their actuarial, legal and investment advisers, we ensure the covenant is integrated into trustees’ funding and investment decisions, as expected by the Regulator.  We also support trustees when the covenant changes, usually as a result of corporate activity such as a merger or acquisition, debt refinancing or business restructuring.

Although a full covenant assessment is usually carried out every three years to coincide with the actuarial valuation, the Regulator expects trustees to monitor the covenant between valuations.  We offer a variety of monitoring solutions from ‘light touch’ KPI monitoring to detailed dashboards and commentary.

We tailor our service to each client which can range from regular covenant assessments to large transaction- or funding-based projects.

We have experience of a vast range of industries and are also a leading provider of covenant analysis to the non-profit and charitable sector.

Contact us for more details of our services or for a no-obligation, confidential discussion of your requirements.

At every actuarial valuation trustees and employers need to agree an appropriate level of funding to remove any funding shortfalls or to target self-sufficiency or buyout.

We can help trustees understand the level of contribution it would be reasonable to request from the employer taking into account cash generated by the employer and other calls on cash.

We can also take an active role in negotiations, advising trustees on strategy and helping secure appropriate funding for the scheme, as required.

For funding discussions we can consider the availability of non-cash security measures such as guarantees, asset-backed structures and charges over assets (contingent assets).

A corporate transaction can have a material impact on the employer covenant.  Trustees will want to ensure that the scheme is not disadvantaged by such activity where it could result in the employer being less able to support the scheme.

Examples of corporate transactions are:

• Sales and acquisitions of companies and assets
• Debt refinancings
• Corporate restructurings
• Dividend payments
• Share buy-backs

We have been involved in a large number of corporate transactions including many high profile situations.  We use our considerable corporate finance and restructuring expertise to advise trustees on the impact of transactions and to propose appropriate mitigation, where applicable.  We can also assist trustees in their mitigation discussions with employers and in liaising with the Pensions Regulator.

Contingent assets provide additional funding support for a pension scheme in certain circumstances.  For example, a guarantee could strengthen the covenant as the guarantor would meet the pension obligations of an employer in the event the employer were not able to meet them itself.  A charge over assets would entitle the scheme to an asset in the event the employer became insolvent.

Contingent assets can provide non-cash (when put in place) alternatives to pension contributions and strengthen the covenant.

We are used to considering the availability of contingent assets for trustees and helping trustees secure these as part of their funding discussions with employers or as mitigation for corporate transactions.

We think creatively and have experience of a wide range of measures that can be used to identify additional security for members’ benefits.

Consideration of a scheme’s potential recovery on insolvency is an important aspect of covenant analysis.  Even when the likelihood of insolvency is remote, it is important for, and TPR will expect, trustees to understand the scheme’s priority relative to other creditors in a worst case scenario, and the impact of corporate events on any recovery.

We have considerable insolvency and restructuring expertise in-house which enables us to advise on insolvency outcomes.  We can construct relatively simple analyses to very complex models, from Estimated Outcome Statements to large group models known as Entity Priority Models (EPMs).

We can advise trustees on the potential impact of transactions on the covenant.

The Pensions Regulator has wide-ranging powers to prevent employers from avoiding their funding obligations, called moral hazard (or anti-avoidance) powers.  In particular, Contribution Notices allow TPR to require companies and directors to pay monetary amounts to pension schemes, and Financial Support Directions allow TPR to require appropriate financial support is put in place for a pension scheme.  Further The Pension Schemes Act 2021 introduced criminal sanctions for individuals involved in activity that weakens a pension scheme’s security.

We have a detailed understanding of the eligibility criteria for TPR’s moral hazard powers.  We can prepare eligibility assessments to assist trustees in seeking the Regulator’s help to remedy unmitigated detriment caused by corporate events or under-resourced schemes.

Asset-backed contribution structures (ABCs) are a form of contingent asset where a pension scheme is provided with a share in a corporate structure that contains an asset.  The structure pays an income stream to the pension scheme and the asset acts as security in case the structure is no longer able to pay that income.

Trustees need to value the ABC structure to allow it to be taken into account in actuarial valuations and annual funding updates.  The Pension Protection Fund also allows ABCs to be taken into account for PPF levy purposes provided the structure has been appropriately valued.

The structure of ABCs can be somewhat complex and they often require expert help to value.  We have experience of a number of ABC structures containing a variety of assets.  Our in-house insolvency expertise allows us to value these for trustees on the basis specified by the PPF, which could result in a lower PPF levy.

Guarantees are a form of contingent asset that provide additional funding support for a pension scheme in certain circumstances.  A guarantee could strengthen the covenant as the guarantor would meet the pension obligations of an employer in the event the employer were not able to meet them.

Also the Pension Protection Fund allows guarantees to be taken into account for PPF levy purposes provided the expected recovery under the guarantee has been appropriately valued.

Our in-house insolvency expertise allows us to carry out insolvency analysis for trustees on a basis specified by the PPF, which could result in a lower PPF levy.

A Flexible Apportionment Arrangement (FAA) is a mechanism for transferring an employer’s responsibility for its pension scheme to another company without triggering a section 75 (insurance buyout) liability.  Trustee consent is required and trustees must be satisfied that in agreeing to an FAA the Statutory Funding Test is met (broadly that the scheme and its members will not be disadvantaged by the FAA).  FAAs are very common in particular where groups undergo a corporate restructuring.

A Regulated Apportionment Arrangement (RAA) is a restructuring mechanism that allows a financially distressed employer to separate itself from its liabilities in relation to its pension scheme, without triggering an exposure to TPR’s moral hazard powers or making the scheme ineligible for the PPF.  RAAs are much rarer and usually involve an employer that is at serious risk of inevitable insolvency.  In such a situation the scheme will usually enter the PPF in a controlled way.  TPR will want to be satisfied that the employer’s insolvency is inevitable and that the RAA provides a better outcome for the scheme than an insolvency process or the use of its anti-avoidance powers.

We have considerable experience of advising on both FAAs and RAAs.  For FAAs we are skilled in recommending appropriate mitigation to ensure the Funding Test is met, and for both FAAs and RAAS in supporting trustees in their discussions with the employer.

Trustees are required to assess the strength of the ability of an employer to support its pension scheme as this is a central component of trustees’ risk management and has been a core theme of funding guidance published by the Pensions Regulator.

From an employer perspective the assessment of the covenant can have a bearing on funding assumptions used for actuarial valuations and investment strategy, and therefore the cost of supporting the scheme.

Employers therefore have a material interest in covenant assessment, how they should participate and, if necessary, question the outcome.

We help many trustee boards assess their employer covenant.  We also have an in-depth understanding of the trustees’ focus, and TPR’s expectations, for this analysis and the funding process in general.  We are ideally placed to advise employers on how to participate in and respond to a covenant assessment, and engage in the funding process more generally.

At every three yearly actuarial valuation trustees and employers need to agree an appropriate level of funding to remove any funding shortfalls or to target self-sufficiency or even buyout.

We have an in-depth understanding of the trustees’ focus for the funding process as well as TPR’s expectations of trustees and employers.

We can help employers respond to trustees’ funding requests and support employers in negotiations to help secure mutually acceptable funding for the scheme.

We can consider the availability of non-cash security measures such as guarantees, asset-backed structures and charges over assets (contingent assets).

A corporate transaction can have a material impact on the employer covenant.  Trustees will want to ensure that the scheme is not disadvantaged by such activity.  Employers will want to understand whether planned corporate activity could trigger mitigation requests from the trustees or even exposure to TPR exercising its moral hazard powers.

Examples of corporate transactions are:

• Sales and acquisitions of companies and assets
• IPOs
• Debt refinancings
• Corporate restructurings
• Dividend payments
• Share buy-backs

We have been involved in a large number of corporate transactions including many high profile situations.  We have an in-depth understanding of the trustees’ and TPR’s expectations in these situations, and are ideally placed to advise employers on how to achieve their corporate plans in an optimal manner.

We use our considerable corporate finance and restructuring expertise to advise employers on the potential impact of transactions on the covenant.  We can also support employers in their discussions with trustees and in liaising with the Pensions Regulator.

Contingent assets provide additional funding support for a pension scheme in certain circumstances.  For example, a guarantee could strengthen the covenant as the guarantor would meet the pension obligations of an employer in the event the employer were not able to meet them.  A charge over assets would entitle the scheme to an asset in the event the employer became insolvent.

Contingent assets can provide non-cash (when put in place) alternatives to pension contributions and strengthen the covenant.

We are used to considering the availability of contingent assets for employers and helping employers incorporate these into their funding discussions with trustees or as mitigation for corporate transactions.

We think creatively and have experience of a wide range of measures that can be used to identify additional security for members’ benefits.

Consideration of a scheme’s potential recovery on insolvency is an important aspect of covenant analysis.  Even when the likelihood of insolvency is remote, it is important for, and TPR will expect, trustees to understand the scheme’s priority relative to other creditors in a worst case scenario, and the impact of corporate events on any recovery.

We have considerable insolvency and restructuring expertise in-house which enables us to advise on insolvency outcomes.  We can construct relatively simple analyses to very complex models, from Estimated Outcome Statements to large group models known as Entity Priority Models (EPMs).

We can advise employers on the potential impact of transactions on the covenant.

The Pensions Regulator has wide-ranging powers to prevent employers from avoiding their funding obligations, called moral hazard (or anti-avoidance) powers.  In particular, Contribution Notices allow TPR to require companies and directors to pay monetary amounts to pension schemes and Financial Support Directions allow TPR to require appropriate financial support is put in place for a pension scheme.  Further The Pension Schemes Act 2021 introduced criminal sanctions for individuals involved in activity that weakened a pension scheme’s security.

Employers will want to ensure that any planned corporate activity will not trigger an exposure to TPR exercising its moral hazard powers.

We have a detailed understanding of the eligibility criteria for TPR’s powers.  We can prepare eligibility assessments to assist employers in planning and executing corporate activity and to recommend appropriate mitigation to minimize moral hazard exposure.

For many trustee boards the ultimate goal in finding security for their defined benefit schemes will be to transfer responsibility for the schemes to an insurer.

These transactions are known as bulk annuity purchases and can be structured as either buyouts or buy-ins.  A buyout involves usually all the scheme liabilities transferring to the insurer and the scheme is then wound up – it has no further link with the employer.  A buy-in involves the insurer paying benefits for part or the whole of the membership but ultimate responsibility for all scheme obligations remains with the scheme and the sponsoring employer.  A buy-in policy is an asset of the scheme.

Both buyouts and buy-ins represent material transactions for trustees and the handing over of substantial amounts of scheme assets to an insurer.  Like any material transaction affecting their schemes, Trustees will want to be sure that they understand the risks involved and they are satisfied that the insurer will be a suitable counterparty to assume the liabilities.

Insurance regulation is designed to ensure insurers have sufficient assets to meet their obligations.  However the insurance market and regulatory environment is complex and may be unfamiliar to many trustees.

Argyll has dedicated insurance expertise and detailed knowledge of the complex structures in which insurers can be invested.  We are not usually otherwise involved in the buyout or buy-in process, which means our analysis is completely independent, strengthening the Trustees’ governance trail.

We can help trustees by providing due diligence reports on insurers to help them understand the insurers’ financial strength, how they compare with their peer group and ultimately get comfortable that the buyout or buy-in should proceed.