“Trustees need to understand if their sponsor’s cash flow forecasts are being realistic about the cost of transition and whether they are at risk of not implementing the promises they have made to stakeholders. This can have both financial and reputational impacts on sponsors and a knock-on impact on the employer covenant,” it added.
Net zero strategies are now commonplace amongst many organisations, and particularly for large multinational companies. There is increasing pressure on companies to act, often requiring costly investment, which can be challenging to implement at a time when many businesses are struggling due to the challenging economic environment.
LCP is urging trustees to take three key actions:
- develop a robust understanding of their sponsor’s net zero strategy;
- analyse how this strategy interacts with the financial information assessed (such as cash flow forecasts);
- integrate ESG factors into broader covenant assessment and journey planning strategies.
John Parnis England, senior consultant at LCP, said: “It’s good news that net zero strategies are being taken seriously in a lot of cases. However, the investment required can be significant, and trustees need to be on the ball when it comes to scrutinising how this will be funded.”
He said that decisions will need to be taken on how such funding needs will be prioritised alongside other competing demands for cash such as debt servicing, “regular” capital expenditure and dividends.
“Where there is a DB pensions arrangement in place, the sponsor may also be required to pay contributions to the scheme. Our new tool LCP Beacon provides clear and tailored actions for individual schemes,” Parnis England noted.
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