Should trustees ‘grab a share’ as companies pile up cash?
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Companies are stockpiling cash as Covid-19 looks to have led to a change in risk appetite, but most pension schemes have not seen any of the reserves come their way. Is now the time to negotiate a share for the defined benefit scheme?
More than half (58%) of companies saw cash reserves increase over the past year, with 16% saying they are now at an all-time high. What is more, almost three-quarters (73%) are looking to strengthen their reserves further to be in better shape for any future crisis, research by asset manager Investec among 100 senior executives has found.
Companies cancelled investments and cut costs
The increases are as a result of the Covid-19 pandemic – 58% said they saw revenues increase during the pandemic, but half (51%) attributed savings to cancelling investment projects, and 44% say it is down to cost-cutting. Around one in three (34%) have sold assets. Finally, 17% are cash rich because of government Covid loans.
However, the picture is not uniform. For nearly two-fifths of companies (38%), reserves went down either because they used it to fund operations or projects they were committed to but for which they no longer had all the funding because of the crisis.
CFOs ‘grabbed the purse strings’
The crisis has made companies focus on cash and crisis preparedness, said Richard Farr, managing director at covenant specialists Cardano Advisory.
"The lockdown gave a rare opportunity for CFOs of hitherto healthy companies to grab the purse strings and marshal all the troops into focussing on cash saving, cost cutting, and re-assessment of those fanciful investment proposals,” said Farr.
Coupled with a massive reduction in sales, this meant that more attention was placed on collecting old debtors and not buying new supplies, he explained. “All this meant, for those who did it correctly, was a massive rise in liquidity which is now being unwound as part of the bounce back,” he said.
‘Now is the time’ to demand a part of the covenant
The lockdown shock has changed behaviours, Farr noted, and made companies leaner and fitter for new challenges such as complex supply chain stresses, new Covid waves and the green transition.
Faced with all these issues, “the last thing the CFOs would have wanted to do was to fund the pension scheme. And most did not,” said Farr, adding that most pension trustees were understanding given the situation.
With the main stress of lockdowns over, trustees should however become proactive, he advised. For those who have seen healthy liquidity “now is the time to grab an equitable part of the new cash-generating covenant”, he said.
Insolvencies set to accelerate
Farr also had a warning for schemes where employers did not show financial prowess in lockdown. “Be prepared for the worst. For those covenants that have been exposed by lockdown and had a harsh light shone upon the competence of management to handle this crisis, it can only get worse,” he said.
Many employers have built up cash reserves, taking advantage of Covid support mechanisms, said Andy Palmer, a partner in the pensions covenant advisory of BDO.
“We haven’t seen increased payments to schemes” as a result of this, but there have been fewer requests to defer contributions of late, he noted.
“As certain Covid restrictions on instigating winding-up proceedings lapse, in general we expect to see more insolvencies in the coming months,” he said, although not all will have a DB scheme. Sectors that face challenges include manufacturers having to cope with high energy costs, and logistics firms suffering from driver and container shortages.
Update: A new Covid variant of concern - 'omicron' - and accompanying restrictions regarding face masks and travel are set to influence how employers will fare in coming months. Companies in the travel industry have expressed concern over the effect of new quarantine and PCR testing requirements, the FT reports, having only just begun to recover after close to two years of restrictions.
Update: A new Covid variant of concern - 'omicron' - and accompanying restrictions regarding face masks and travel are set to influence how employers will fare in coming months. Companies in the travel industry have expressed concern over the effect of new quarantine and PCR testing requirements, the FT reports, having only just begun to recover after close to two years of restrictions.
