The Pensions Regulator

Code of practice 03
Funding defined benefits

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Approaching the valuation process

Assessing the employer's covenant

57. It is essential for the trustees to form an objective assessment of the employer's financial position and prospects as well as his willingness to continue to fund the scheme's benefits (the employer's covenant). This will inform decisions on both the technical provisions and any recovery plan needed.

Obtaining information about the employer's covenant

58. In order to undertake such an assessment, the trustees will need to obtain information about the employer. Some of this information is likely to come directly from the employer.
59. The employer is obliged, on request, to provide the trustees with such information as they or their professional advisers reasonably require for the performance of their respective duties.⁵⁶ This includes information reasonably required to assess the employer's covenant.⁵⁷ Trustees should encourage employers to share the relevant information at an early stage. They should understand that some of the information provided by the employer may be confidential.
60. The trustees should also consider using commercially available services or other sources of information such as:
    • rating agencies or credit scoring institutions;
    • credit specialist advisers;
    • reports of industry regulators (in the case of certain regulated industries);
    • information which may become available in connection with the risk-based element of the Pension Protection Fund's levy; or
    • any new developments in the credit advisory services market aimed at assisting the trustees to evaluate the employer's financial standing.

Further information about the employer

61. Trustees should be alert to information about the employer which is in the public domain and should also encourage the employer to keep them informed of matters which are likely to have a material impact upon the scheme.

Dealing with trustees' conflicts of duty or interest

62. Some trustees may have a conflict of duty or interest. For example, trustees who are directors of the employing company may have a conflict between their duties as trustees and their duties to shareholders. And as most trustees are scheme members, the majority of whom are employed by the sponsoring employer, they may have personal conflicts of interest.⁵⁸ Trustees should remember that, when taking decisions as trustees, their other duties and interests must be set aside.
63. It is of the greatest importance that the existence of conflicts is recognised as soon as possible (preferably before any negotiations have been conducted). Where appropriate, trustees should ensure that they obtain legal advice as to how to manage these conflicts.

Negotiating with the employer

64. Agreement may often be reached without the need for negotiation. However, if negotiation proves necessary, trustees should be well prepared and be willing to work with the employer to reach a common agreement.

Alternative dispute resolution (ADR)

65. Trustees and sponsoring employers may wish to consider using a professional ADR service (examples of which are mediation and non- binding arbitration) where they are unable to reach agreement. They should weigh up the costs of doing so against the likely benefits, in the light of the prospect of success.
66. ADR may be appropriate where trustees and the employer have, after extensive discussions, come close to agreement but some sticking points remain.
67. In order to get the best out of ADR, both parties will find it helpful if, in advance, they are able to:
    • identify the areas of disagreement;
    • identify their reasons for not being able to reach agreement; and
    • agree on a discussion timetable.
68. The trustees and the employer should seek to enter ADR early enough so that the scheme funding process can be completed within the overall deadline, though ADR can often be quickly arranged and swiftly carried out.

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