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New guidance for assessing and monitoring DB employer covenant

Ref: PN15-39
Thursday 13 August 2015

The Pensions Regulator has today published the first in a series of guides for trustees of DB occupational pension schemes to help them apply the defined benefit (DB) funding code of practice.

The publication provides good practice guidance on how to assess and monitor an employer’s covenant, the employer’s legal obligation and financial ability to support their scheme. In response to feedback, we have taken a practical approach, breaking the guidance down into a series of user-friendly examples, checklists and scenarios - available alongside the full, detailed guidance document.

To view the guidance and resources go to assessing and monitoring the employer covenant.

One of the code’s main principles is the need for an integrated approach to risk management. Understanding the strength of the employer covenant underpins effective risk management.

Lesley Titcomb, Chief Executive, said: “Our code highlights how trustees need a strong understanding of a scheme’s covenant in order to take an integrated approach to risk management, and use the full flexibility of the funding regime.

“I urge trustees to use this important guide to assess and monitor their employer covenant in a way that is proportionate to the circumstances of the scheme and the need for an employer to grow. We encourage trustees and employers to work openly and collaboratively together.”

These documents can be used by trustees as a handbook to guide them step by step through assessing their employer covenant. Although primarily aimed at scheme trustees, it will also be of interest to the sponsoring employers and their advisers.

The guidance published today will help trustees decide:

  • who should assess the covenant
  • what a proportionate approach should look like
  • how the covenant should be assessed in the context of the scheme
  • how to monitor the covenant on an ongoing basis and prepare contingency plans to react appropriately
  • what to consider to improve the security of the scheme

The guidance also outlines specific considerations for schemes in the not-for-profit sector and non-associated multi-employer schemes.

The regulator will be promoting the guidance among DB scheme trustees and their professional advisers via its ongoing communications campaign work including direct emails, social media posts and stakeholder engagement.

Later this year, the regulator intends to produce further guidance to help trustees navigate the DB code, including guides on integrated risk management and investment strategy.

Editor's notes

  1. The DB landscape consists of 6,650 schemes with a combined membership of 12 million people and assets of £1,137.5 billion.
  2. The information published today replaces the regulator’s previous monitoring employer support (covenant) guidance, published in 2010. Content has been updated in light of the new DB code of practice, published in 2014, though the principles will be familiar to users of the previous covenant guidance.
  3. The Pensions Regulator is the regulator of work-based pension schemes in the UK. Our statutory objectives are: to protect members’ benefits; to reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only).

Press contacts

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David Morley 01273 662091
Out of hours 01273 648496