UK - North Yorkshire County Council has appointed an investment consultant for its local government pension scheme. And Punter Southall Transaction Services (PSTS) has warned trustees may need to do more than "high level" assessments of employer covenants as rail maintenance firm Jarvis has confirmed it is entering administration.In November 2009 North Yorkshire re-tendered the investment consultancy and investment adviser contracts for its £1.2bn (€1.35bn) pension fund, as both existing contracts are reaching the end of their three-year period. (See earlier IPE article: UK roundup: Celestica, North Yorks and ICAEW)
Although North Yorkshire is still in the process of awarding the investment adviser role, it confirmed Hewitt Associates as its independent investment consultant, replacing Mercer.
The appointment of a new investment consultant comes as the council is seeking a manager for a "plain vanilla" actively-managed corporate bond portfolio, following concerns about the existing and "relatively complex" bond mandate run by ECM. (See earlier IPE article: UK roundup: North Yorks, Aggregate Industries, Woolworths, CN Group)
It follows a decision by Jarvis last week to enter administration because it was unable to continue operating as a going concern. Figures from the company's annual accounts for 2009 showed it sponsors three sections of the Railways Pension Scheme, with combined assets of £150.2m, and also operates the combined £25.2m Streamline Pension schemes. At the end of March 2009, the accounts showed an overall deficit of £6.7m from the several pension sections.
Lorant Porkolab, a senior consultant within the covenant consulting practice of PSTS, said the Jarvis administration is a "harsh and alarming reminder for pension scheme trustees that companies can indeed go bust", even those operating in the 'real' economy.
Porkolab argued many UK companies have significant secured bank debts that could become difficult to manage in the current economic situations, and noted trustees need to "fully understand these credit arrangements, the key terms of the company's obligations, the banks' rights and the potential implications on the pension scheme".
PSTS uses Jarvis as an example as it previously had a market capitalisation of around £1bn, but constant restructuring and the impact of rail accidents and profit warnings significantly changed the strength of the covenant provided to the pension schemes.
"Its pension liabilities which are now in excess of £200m in total have become material relative to the reduced size of the business," said Porkolab. "There are several lessons trustees can take away from this case, and one of them is the importance of monitoring the sponsor covenant closely; and not just the sponsoring employer's annual results, but all those corporate and business activities and factors that can potentially impact the pension scheme."
PSTS noted Jarvis generated nearly £350m in revenue and an £18m operating cash flow in its last financial year to March 2009, so "on the surface the employer covenant might have looked satisfactory".
But Porkolab warned: "Although high level covenant assessments can be sufficient in many cases, often trustees must go beyond that and understand some of the underlying details, such as key contracts, business strategy, revenue and profit segmentation or diversification in order to feel fully comfortable with their understanding of the employer covenant."
PSTS' warning on employer covenant follows the recent publication of the Pension Regulator's (TPR) corporate plan, which highlighted employer covenants and administration as key focus areas in 2010. "Therefore trustees, if not doing so already, should also be treating this as a priority," added Porkolab. (See earlier IPE article: TPR eyes admin and employer covenant as key targets)
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