By Kiri McEniff
The Pensions Regulator has issued new guidance for trustees of Defined Benefit Pension Schemes on assessing and monitoring the employer covenant, replacing the previous guidance issued in November 2010. This is refreshing to see as the market has developed considerably in recent years and the new guidance reflects this.
The employer covenant is the extent of the employer’s legal obligation and financial ability to support the scheme now and in the future. Regularly assessing and monitoring the covenant is a DB scheme requirement under Part 3 of the Pensions Act 2004.
The consideration of employer covenant is a key area of responsibility of Trustees and should be assessed at each triannual valuation and monitored regularly between formal reviews. The new guidance sets out the role of the covenant, how it should be approached, when an assessment should be performed and when it should be commissioned externally. The main points of the guidance are illustrated by checklists, tables and practical examples.
The guidance is a useful tool to trustees in understanding how and when employer covenant should be assessed, either with advice from a covenant assessor or based on their own assessment.
The Regulator advises trustees to consider commissioning an external expert covenant assessor where:
– The trustees do not have the necessary expertise and experience to assess the legal and financial aspects of the covenant;
– The trustee board as a whole is not able to take an objective view (for example, if an influential trustee holds an important role in the employer);
– The scheme is highly reliant on the covenant (for example, the scheme is large relative to the employer, is under-funded or has a higher risk investment strategy);
– The covenant is complex (for example, there is a complex legal or operating group structure or an asset-backed contribution (ABC) structure is being used);
– The covenant is undergoing significant changes (for example, the employer is restructuring); and
– The employer and trustees do not have a good relationship or the employer has been unwilling to provide requested information.
The issue of the new guidance indicates the value the Regulator places on the employer covenant in the valuation process. Our team of covenant experts have undertaken numerous covenant reviews in recent years and are more than happy to answer any queries you may have. Feel free to give us a call on 02895 320155.