Pension scheme cash liquidity and covenant

The recent announcement by Woodford Investment Management to suspend trading in the Woodford Equity Income Fund illustrates the need for trustees to ensure they can access cash in order to meet pension scheme commitments if such an event was to derail planned divestments and restrict access to cash.

If cash contributions are below cash commitments for a pension scheme then trustees will need to plan for the efficient sale of investments on a regular basis to ensure liquidity. Day to day traded funds clearly allow flexibility for this and may well form part of an investment portfolio that includes higher return but less liquid investment products. However if the ability to access cash funds is restricted due to an unforeseen event, how do trustees meet ongoing pension scheme commitments? Pensioners must be paid.

Less liquid investment products may require long notice periods for divestment and clearly property investments could take months to sell. Could the trustees rely on the employer to provide some short-term liquidity? Would the employer's cashflow enable acceleration of the recovery plan payments as a potential option to provide liquidity?

Our view

The Woodford Equity Income Fund issue highlights the need for trustees to ensure they are able to access cash if planned divestments have been restricted. If trustees should look to the employer for support, what work has been done to establish if it is able to do so?

We can work with pension scheme trustees to answer the above questions should such an event arise. Whilst events of this nature are rare, it is a reminder that even investment funds with strong track records can run into difficulties and expose pension scheme trustees to risk.