The day after the Budget, the directors and secured lenders of Jarvis, the rail maintenance and support service business, decided to place the Company and certain of its subsidiaries into administration. The Company participates in several pension schemes and has some material pension obligations, hence the decision may easily affect members of these pension schemes too.
Lorant Porkolab, a Senior Consultant within the Covenant Consulting practice of Punter Southall Transactions Services (PSTS), commented:
“The news regarding Jarvis might be a harsh and alarming reminder for pension scheme trustees that companies can indeed go bust. As this example shows, it can easily happen to substantial businesses operating in the “real” economy and not just to complex and opaque financial organisations, like Lehman. There are many other UK companies which – similarly to Jarvis - have significant secured bank debts and find it difficult to manage these under the current challenging economic conditions. Pension scheme trustees should fully understand these credit arrangements of the sponsoring employer, the key terms of the company’s obligations, the banks’ rights and the potential implications of these on the scheme.”
“Jarvis – once the darling of the stock market with market capitalisation of around £1 billion – went through a long and rough journey of constant restructuring which included divestments, joint venture building and refinancing activities, but was also overshadowed by rail accidents, profit warnings, and never ending need for additional financial support. During that process the covenant strength provided by the Company to its pension schemes has changed significantly, and its pension liabilities which are now in excess of £200 million in total have become material relative to the reduced size of the business. 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. Clearly, for Jarvis and its creditors, including the pension schemes, one of the key areas of concern must have been the Company’s contract with Network Rail and the heavy reliance on this.”
“Jarvis generated nearly £350 million revenue and £18 million operating cash flow in its last financial year to 31 March 2009, so on the surface of it, the employer covenant might have looked satisfactory. 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, just to mention a few, in order to feel fully comfortable with their understanding of the employer covenant.
"Employer covenant is firmly on the agenda as a key area of focus for the tPR as their recently published Corporate Plan 2010-2013 outlines. Therefore trustees, if not doing so already, should also be treating this as a priority."
Ends
For further information or to speak with Lorant Porkolab, please contact:
Penrose Financial
Andy Fleming
0207 786 4823
Trustee training - Pension scheme investment (September 2010)
