LGPS funds have been rightly focusing on the impacts on their people, administration and investments, due to the coronavirus pandemic. This note looks at a crucial fourth impact, namely the potential effect on employer covenant and contributions - which are a major source of fund income. Employer covenant is therefore a major risk that funds must effectively manage. The current volatility and uncertainty due to COVID-19 has a twofold impact on both an employer’s finances and its pension funding position. 

Corporate Insolvency and Governance Act 2020

In addition, on 26 June the Government put into force far-reaching reforms to UK insolvency through the emergency Corporate Insolvency and Governance Act 2020 which allows companies to enter into a “pre-insolvency” position. For the LGPS this means statutory demands for unpaid contributions/cessation debts, calls on some security and winding-up petitions are prevented. As funds are already (in most cases) unsecured creditors, where debts are amongst the last to be paid, this prospect will make it even more difficult for funds to recover debts. By the time action can be taken, it may be too late.

This unintended consequence of the Act, alongside the already increased focus on understanding employer covenant in the current environment, puts even more onus on funds to boost employer engagement, improve covenant information and consider pre-emptive action.

Sector specific considerations

The briefing note sets out some high-level covenant considerations and suggested pre-emptive actions that can be taken by your fund with regards to its employers, split between different categories as follows:

• Councils
• Academies
• Further Education sector
• Contractors
• Charities and other not-for-profit organisations 

Download our briefing note 

With the focus in most LGPS funds through the pandemic rightly being on administering benefits and strengthening governance, the crucial contribution income will depend on effective and comprehensive management of employer risk. Do get in touch with your usual Hymans contact if you would like to discuss next steps and prioritisation.