BP's Pension Board Ups Company Health Checks

By Mark Cobley Of FINANCIAL NEWS The governing board of BP's multi-billion pension scheme in the U.K. has stepped up its financial scrutiny of its parent following the Gulf of Mexico oil spill--news that has emerged as the oil group posted a $17 billion quarterly loss thanks to the costs of the disaster. The trustee board, which oversees a pension fund worth GBP13 billion--one of the U.K.'s biggest--has been receiving weekly updates on the financial health of BP ever since the spill began in April, it said in a recently-published report to members. These health-checks, known as 'covenant analyses' and usually performed on trustees' behalf by lawyers or consultants, are industry best-practice for pension schemes in the U.K. However, the checks are normally conducted at most once a year, and for many schemes, only once every three years. They typically monitor a range of business metrics, including trading conditions, litigation, or the loss of major customers, and use this to estimate the company's ability to support the pension fund. They may also include various publicly-available financial measures, such as share price, credit rating and the price of credit default swaps on the company. If the review shows a material deterioration in the strength of the 'covenant', trustees have several options, according to Marc Hommel, head of PricewaterhouseCoopers' pensions practice, which advises boards on such matters. He said: "Trustees should agree courses of action with their sponsoring employer in advance, such as access to the chief financial officer or other senior management, to discuss concerns. I have worked with schemes in the past where trustees have regular meetings with non-executive directors, for example." However, if the financial healthcheck comes back poor and the company is uncooperative, pensions trustees also have certain options for unilateral action, Hommel added. These include moving investments out of equities and into lower-risk fixed income and cash, or reporting the company to the U.K.'s Pensions Regulator. BP's pension fund, however, is in a much stronger position than most of its peers, and not just because the parent company is solvent and cashflow rich, even considering the costs of the Gulf spill. The pension scheme's most recent financial review, in September 2009, showed the plan was 103% funded--though because this was less than its 'trigger level' of 115%, BP is obliged to pay its usual yearly contributions of GBP216 million to the scheme. Since it runs such a large fund, BP also has the luxury of a full-time executive team that manages its investment portfolio, and can also undertake work such as the covenant analysis, in conjunction with external advisers. The trustees instituted a new system of quarterly checks in September 2009, well before the Gulf disaster. But following the spill, the monitoring has been stepped up further so that the scheme's full-time executive arm is keeping a daily watch on BP's business health. They are able to send updates every week to the trustees, according to Sally Bridgeland, chief executive of the scheme. A spokesman for BP said today: "The company works very closely with the pension fund trustees and will do all it can to assist them." Their most recent updates are likely to include news of BP's record quarterly loss, which takes into account the $32.2 billion charge the company has taken for its role in the largest oil spill in US history. That includes a $20 billion fund that will be set up to pay for cleanup costs and meet legal liabilities. The company's chief executive Tony Hayward, who has been criticized for his handling of the company's public response to the crisis, is stepping down and will be replaced by Robert Dudley, the American-born executive currently in charge of BP's cleanup operation in the Gulf. BP also said it would be selling assets over the next 18 months, reducing investment and cutting its dividend. -By Mark Cobley, mark.cobley@dowjones.com (END) Dow Jones Newswires July 27, 2010 09:14 ET (13:14 GMT)