• Rethink the employer covenant

    Employer covenant reviews and the impact of COVID-19.


Rethink the employer covenant

29 March 2021

Employer covenant reviews and the impact of COVID-19

Since March 2020, we have carried out many employer covenant reviews and seen first-hand the impact that COVID-19 has had on employers.

Various businesses have benefited from, and continue to rely on, government support, whilst others secured access to additional liquidity from other sources. The funding has allowed these businesses to maintain their operations.

We have seen the benefits of government support, including temporary restrictions on statutory demands and winding-up petitions (in relation to unpaid employer debts), translate into a significantly lower insolvency rates. UK company insolvencies have remained low throughout the pandemic, and in 2020 there were 12,646 UK company insolvencies, compared to 17,254 in 2019 (The Insolvency Service, Monthly Statistics, December 2020).

In many cases, COVID-19 has been a catalyst for management making difficult decisions and implementing operational improvements. Some employers have also sold non-core assets to improve cash balances and liquidity. This along with substantial amounts of “dry powder” available to invest has helped drive corporate M&A activity across the UK, which was up in 2020, compared to 2019 (as measured by total transaction value in data provided by Mergermarket Limited).

The above actions are likely to have made those employers better placed to provide longer-term support to their pension schemes.

Others have eaten into liquidity headroom and built up debt, whilst continuing to wait for some form of normality in trading to return, without any significant adaptation to their business models.

A reassessment of business models and commercial thinking

BDO has developed a three-stage framework known as Rethink that helps businesses to reassess their commercial thinking, manage their priorities, address issues, and develop operational and financial strategies in light of the pandemic.

We have used this framework across our business, both in the UK and internationally. The stages are:

  • React: immediate crisis management activity.
  • Resilience: maintain operations during ‘lockdown’ and other disruptions to both supply and demand.
  • Realise: develop a plan for a ‘new reality’ of supply and demand. 

From our employer covenant reviews, we have observed the transition that employers have made through the three-stages. However, we understand that every situation is different and employers will have a range of views and approaches to ensuring their long-term survival. They will be at different stages in the Rethink framework, and we would not discount the possibility of employers finding themselves back in the ‘React’ phase once government support is removed.

Practical considerations for employers

If employers are in the ‘React’ phase, they may need to defer pension contributions and/ or renegotiate recovery plans.

Some employers however, may already be facing demands from trustees for an increase in contributions. Either because they were deferred earlier in the pandemic, or because an actuarial valuation has recently been completed, reflecting a weakened covenant due to COVID-19.

During this period it is essential to monitoring the employer covenant. This allows trustees to understand where the employer is in the Rethink framework, how durable the employer covenant is, and whether or not this could, therefore, impact the ability of the pension scheme to reach its long-term funding target.

There may also be a need for employer covenant advice if there is M&A activity taking place, with early engagement between the employer and the trustees needed, and a clear understand of why certain trade and assets are being purchased or sold.


Download our Rethink flyer that provides a guide to the framework and a more detailed look at what this might mean for covenants supporting your defined benefit pension scheme (including a case study).

If you would like more information about anything you have read, please contact Matthew Gibson, Andy Palmer or James Day.