Assessing and monitoring the employer covenant
Assessing and monitoring the employer covenant

The following Pensions guidance note provides comprehensive and up to date legal information covering:

  • Assessing and monitoring the employer covenant
  • Regulatory framework—background
  • Trustees' scheme funding duties—9 key funding principles in DB Funding Code
  • What is the employer covenant?
  • How trustees should approach covenant assessments
  • Internal or external covenant assessment—trustees decision
  • When trustees should undertake an employer covenant review and monitoring of the covenant
  • Assessing the employer covenant—scope of review
  • Trustees must understand the employer's legal obligations to the scheme and its ability to meet them
  • Employer’s plans for its business—impact on employer covenant
  • more

FORTHCOMING DEVELOPMENT: Through the consultation on the DB funding code published on 3 March 2020, the Pensions Regulator is consulting on the extent to which the employer covenant should remain a key aspect of scheme funding, including how it should be assessed and for how long reliance can be placed on it. Among other things, TPR proposes that trustees should be allowed to imbed some reliance on the employer covenant and to allow more immature schemes to assume and take more investment risk on their way to low dependency funding. TPR has identified three options as to how the employer covenant could be integrated into its proposed Fast Track approach (beyond the default assumption that the employer covenant is taken into account when considering whether a recovery plan is affordable). TPR’s preferred option is to integrate the employer covenant into Fast Track technical provisions via the discount rate (by recognising the employer covenant as a key security mechanism to support assumed/actual investment risk). This option is consistent with current practice in how covenant feeds into valuations. In addition, TPR is seeking views on whether it should (i) retain its current holistic approach to assessing employer covenant (but with some more specific guidance), or (ii) simplify employer covenant to a formal