Covenant lessons from the Greek crisis

The hourly media updates on the umpteen rounds of resolution talks have escalated fears of a Greek exit from the eurozone over recent weeks.

It is easy to forget that way back in 2005, in the shadow of the Athens Olympic Games, the European Commission first implemented a programme of fiscal monitoring in Greece; this crisis has been 10 years or more in the making. 

Waiting until there is a problem with a covenant and then asking for it to be fixed often proves to be the wrong strategy

Paul Jameson, Penfida

However, there is no doubt that July 2015 will mark a watershed moment in eurozone politics, a period that pushed Greece to the brink of bankruptcy and exposed bitter factions at the heart of the European Union.

Amid this uncharted economic environment pension scheme trustees may be conducting their own crisis talks with employer sponsors, negotiating agreements that protect the pension promises of the past while safeguarding the sustainability of the company.  

During periods of poor performance this can be a challenging task, and industry experts are encouraging trustees to 'fix the roof while the sun is shining'.

Paul Jameson, co-founder of corporate advisory company Penfida, said the best time for trustees to negotiate a long-term journey plan for a scheme is during periods of strong performance.

“As is quite often the case in life, the time to ask for things is when people are well placed to give you them, not when they’re in a less fortunate situation,” he said.

“Waiting until there is a problem with a covenant and then asking for it to be fixed often proves to be the wrong strategy in retrospect… companies are often in a better position to grant additional funding or additional alternative protection to schemes when they’re performing well."

Jameson said trustees can afford to continue running some investment risk where sponsor covenants were particularly strong, as long as additional protections are also put in place.

“By running that continued risk they may need to ask for less funding from the sponsor than otherwise would be the case, but if they’re going to continue running that risk they probably want to think about some other protections that would balance that risk,” he said.

Case for consistency

However, Nick Griggs, partner and head of corporate consulting at Barnett Waddingham, said trustees should adopt a consistent approach to scheme funding and investment, regardless of company performance.

“From a funding perspective, while there’s a deficit in the scheme it's all about what the maximum the company can afford to pay into the scheme is, acknowledging the company’s plans for investments and other competing pulls on that cash,” he said.

Jonathan Land, partner and head of pension credit advisory at consultancy PwC, said both schemes and sponsors should be aware of the “value at risk” built up within the scheme.

“One thing to be aware of even in the good times is how big the risk in the scheme is,” said Land, adding: “We see situations now where people [would] rather take a bit of risk off the table, even if that means putting slightly higher contributions… or putting an asset-backed structure in place.”

Long-term objectives

Jonathan Reynolds, client director at professional trustee company Capital Cranfield, said trustees need to maintain focus on their own long-term objectives for schemes in any negotiations with sponsors.

He said: “You could easily get the [financial director] saying, 'Well hang on a second, now that we’re doing really well can you start re-risking a bit? Can we reduce our contributions?'

“The reality is our long-term goal is to get the scheme properly funded as quickly as possible, so as trustees we’re always very reluctant to see contributions go down.”