Getting to grips with the employer covenant

The Pensions Regulator has today published a statement for trustees of defined benefit schemes. This details upcoming guidance and e-learning which aim to ensure that trustees improve their understanding of the support that a sponsoring employer provides for a scheme.

This statement sets out the regulator’s expectations of trustees in relation to employer covenant issues, and builds on last year’s focus on scheme funding and covenant. The regulator's research and casework experience has shown that whilst some schemes take a sound approach, for others improvement is still necessary.

The Pensions Regulator’s acting chief executive Bill Galvin said:

“Most trustees will need to monitor the strength of their sponsor’s covenant on an ongoing basis and all should have a very good idea of exactly how they might respond in different scenarios. This means they require a good knowledge of the sponsor’s business, agreed trigger points for action, and clear options on how to act to increase scheme security.

“Monitoring the covenant can be as important as monitoring investment performance.”

The regulator will publish a series of new guidance documents for consultation in the coming weeks:

• Guidance on monitoring employer support will provide more information on what trustees should do to measure and monitor employer covenant. It will also outline action trustees should take to strengthen scheme security if needed as a consequence of these assessments. It will provide guidance on how contingent assets and other arrangements can work alongside employer covenant to provide further safeguards.
•  Guidance for trustees of multi-employer schemes will explain the importance of understanding who is legally responsible for supporting the liabilities in a multi-employer scheme; assessing the strength of the covenant supporting the scheme; and the options for mitigating the risk associated with the departure of an employer from the scheme. The guidance covers all the mechanisms which may apply when an employer departs a multi-employer scheme including the two alternative mechanisms introduced by the Department for Work and Pensions in April 2010.
• Following the focus on covenant issues, The Pensions Regulator will be producing revised guidance on transfer incentives, and other situations in which members are asked to consider substituting or converting their benefits. This will replace the current ‘inducements’ guidance and set out a principles-based approach to the issue.

All publications will be supported by ‘bite-sized’ e-learning tools to help trustees.

1. The Pensions Regulator is the regulator of work-based pension schemes in the UK, with objectives to protect members' benefits, promote good administration and reduce the risk of calls on the Pension Protection Fund. Our approach is risk-based focusing on education and enablement, with enforcement where appropriate. We have the ability to:
   • collect information about pension schemes; through scheme returns, under the scheme funding regime and as well as statutory (including whistleblowing) reports;
   • issue notices requiring actions to tackle non-compliance, prohibit trustees who are judged not fit and proper to carry out their duties or appoint independent trustees;
   • direct pension schemes as to how to calculate their liabilities and the contributions required;
   • issue a contribution notice where there is an attempt to avoid liabilities, or a financial support direction where the employer is a service company or insufficiently resourced.
2. Each of the three guidance documents will be subject to the usual 12 weeks consultation period.

• Ben Lloyd 01273 627208
• Katherine Long 01273 811859
• Ruth Hallam 01273 627752
• Out of hours 01273 648496
• www.thepensionsregulator.gov.uk

Non-press enquiries:

Customer support: 0870 6063636
customersupport@thepensionsregulator.gov.uk