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Matthew Harrison, Managing Director, Lincoln Pensions, comments:“Three years ago Tesco would have been seen by most observers as a "gold plated" covenant with its DB pension obligations under control. Roll forward to today's announcement and this perception has clearly shifted in the eyes of the City and (in all likelihood) the pension trustees. |
The Tesco situation acts as a cautionary tale which reiterates the fact that the employer covenant (i.e. its ability to support the pension scheme) is not static and can deteriorate relatively quickly. It highlights the importance of trustees ensuring, as they sail on calmer waters, that they monitor the employer covenant in appropriate depth and, ideally, put in place meaningful downside protection measures to ensure that their members' interests are taken into account when their employer hits choppier waters.
Although the pension deficit numbers in the Tesco situation are unusually large, the general theme is not an uncommon one for UK pension schemes. It provides a timely reminder that even in this phase of increasing consumer and business confidence, DB pension benefits are not necessarily secure. With gilt yields persisting at historically low levels, deficits remain high. Where this is coupled with challenging trading conditions for the employer the, sometimes delicate, balance between the financial position of an employer and the scale of its DB pension obligations can easily be disrupted.
In the current economic climate, a scheme's ongoing reliance on a robust employer covenant remains clear and is likely to persist. The focus of an increasing number of trustees is turning to how they can put measures in place today to protect their members' position if the employer enters "the perfect storm".”
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