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Regulator’s guidance to help trustees assess covenant

Published by Ben Roach on

It is key for trustees to monitor and assess the employer covenant in order to ensure their scheme is properly managed and funded.  To assist with this, The Pensions Regulator (TPR) has published constructive and practical guidance for trustees.

The guidance sets out TPR’s expectations and good practice in relation to covenant assessment.  This is a useful resource for trustees, giving case studies and potential actions to help manage covenant risk.

Proportionate assessment

The guidance will be particularly beneficial for trustees of schemes who do not regularly use external covenant advisers.  TPR has stopped short of requiring schemes to obtain regular external covenant reviews and notes that a less detailed triennial review may be reasonable for some schemes.  TPR states that “covenant assessments should add value to trustees’ decision-making” and that “trustees should consider the costs of commissioning external advice in the context of the benefits it could bring to the scheme”.  Covenant assessment is an essential consideration for trustees but this should be proportionate to the circumstances of the scheme.

TPR gives examples of how trustees could mitigate against adverse future scenarios, for example by using contingent assets to support a higher risk investment strategy.  It is also helpful that TPR has acknowledged that it may be appropriate for trustees to place some reliance on support from non-statutory employers (e.g. overseas parent companies where no formal guarantee is in place), as for many schemes this represents a key source of funding.

“Trustees should consider the costs of commissioning external advice in the context of the benefits it could bring to the scheme ”
The Pensions Regulator

Working with employers

TPR re-iterates its previous comments that trustees and employers should work openly and collaboratively together and that good information sharing by employers can reduce the need for detailed covenant investigations.

Employers may also find the guidance interesting – it sets out the information trustees are likely to request, and how they will use this to assess the level of the employer’s support.  The guidance also considers the interaction of the employer’s ability to fund a scheme with its wishes to invest in its business.  Employers approaching deficit contribution negotiations should understand the factors that trustees will need to consider and the expectations of TPR.

Not for profit employers and non-associated multi-employer schemes

TPR’s guidance also contains specific sections for trustees of schemes with not for profit employers and/or non-associated multi-employer schemes.  This guidance does not provide solutions to the difficult issues faced by many of these schemes but it does highlight some key points for trustees to consider.

Useful reference

Alongside the guidance, TPR has produced a number of handouts summarising key points from the guidance.  These concise checklists are a useful reference for all trustees but trustees who do not employ external covenant advisers would particularly benefit from reading the main guidance document.


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About the author

  • Ben Roach

    Ben is Scheme Actuary to a number of pension schemes and has a particular interest in actuarial valuations under the new scheme funding regime and company accounting standards. He also advises employers on their pension arrangements and has experience of scheme mergers, sales and purchase work, and other corporate transactions.

    View Biography

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