Covenant guide 'last piece of the jigsaw' in DB funding regime
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The Pensions Regulator has published updated covenant guidance for defined benefit trustees, which supports its new DB funding code in force since September.
The new guidance will offer greater certainty about TPR’s expectations when trustees assess their employer covenant, the regulator said. It includes worked examples on aspects of covenant that require the greatest level of trustee judgment.
TPR expects trustees to use the guidance to assess if existing covenant analysis is focused on the right areas and remains proportionate, especially if they have experienced a significant change in their scheme funding position in recent years.
The guide had been expected by trustees looking to adapt to the new funding regime.
Neil Bull, executive director of market oversight, said: “Today’s publication is the last piece of the jigsaw to help schemes carry out valuations under the new DB funding code. For the first time, employer covenant is defined in regulation.”
Bull said is “vitally important” for trustees to understand “that the risk taken on the journey plan to their low dependency target in their funding and investment strategy is supportable by the employer”.
TPR expects all trustees to read applicable sections of the guidance in full, he noted. The revised guidance looks at cash flow, reasonable affordability, maximum affordable contributions, reliability period, covenant longevity and contingent assets.
It puts increased focus on proportionality of covenant assessments “to ensure trustees consider the right level of detail”.
The guide was welcomed by David Brooks, head of policy at consultancy Broadstone, who said trustees and their advisers now have the full picture on how the regulator will expect them to assess employer covenant.
"The latest guidance carries on in a similar vein to the wider funding code as good schemes will already have a handle on their covenant albeit [they] may need to refine their metrics and monitoring," he said.
The new guidance will offer greater certainty about TPR’s expectations when trustees assess their employer covenant, the regulator said. It includes worked examples on aspects of covenant that require the greatest level of trustee judgment.
TPR expects trustees to use the guidance to assess if existing covenant analysis is focused on the right areas and remains proportionate, especially if they have experienced a significant change in their scheme funding position in recent years.
The guide had been expected by trustees looking to adapt to the new funding regime.
Neil Bull, executive director of market oversight, said: “Today’s publication is the last piece of the jigsaw to help schemes carry out valuations under the new DB funding code. For the first time, employer covenant is defined in regulation.”
Bull said is “vitally important” for trustees to understand “that the risk taken on the journey plan to their low dependency target in their funding and investment strategy is supportable by the employer”.
TPR expects all trustees to read applicable sections of the guidance in full, he noted. The revised guidance looks at cash flow, reasonable affordability, maximum affordable contributions, reliability period, covenant longevity and contingent assets.
It puts increased focus on proportionality of covenant assessments “to ensure trustees consider the right level of detail”.
The guide was welcomed by David Brooks, head of policy at consultancy Broadstone, who said trustees and their advisers now have the full picture on how the regulator will expect them to assess employer covenant.
"The latest guidance carries on in a similar vein to the wider funding code as good schemes will already have a handle on their covenant albeit [they] may need to refine their metrics and monitoring," he said.
“For others this should be the prompt they need to ensure good understanding of their covenant and the ability to support long term strategy."
Alex Beecraft, head of covenant and security at consultancy Aon, said the new covenant guidance confirms a regulatory shift in how the health of the sponsor is measured and its strategic implications, recommending early engagement to understand the impact of the guide.
Alex Beecraft, head of covenant and security at consultancy Aon, said the new covenant guidance confirms a regulatory shift in how the health of the sponsor is measured and its strategic implications, recommending early engagement to understand the impact of the guide.
“Sponsors will have to grapple with increased information sharing requirements while trustees will need to clarify how undertakings such as guarantees support their scheme. Thankfully, there is still ample flexibility to be pragmatic and to find appropriate solutions," he said.
