Ongoing Scheme Funding - Employer Covenant

Key Points

  • The employer's 'covenant' is the extent of the employer's legal obligation and financial ability (and to some extent, its propensity or willingness) to support its defined benefit scheme now and in the future.
  • The trustees of the scheme are responsible for assessing and monitoring covenant strength and must take into account covenant strength when setting their investment strategy, funding target and (where necessary) recovery plan.
  • A key step in assessing employer covenant is to establish who the statutory employers are and to establish whether there are any other employers or entities from which the trustees have a legal right to expect financial support.
  • Where the employer is part of a group, especially where it is not the strongest company in the group, the trustees need to decide how much weight to give to the possibility of group support.  The Pensions Regulator cautions against "over-reliance on the wider employer group".
  • The Pensions Regulator suggests that the trustees' covenant review should be 'proportionate' and focus on the employer's short to medium term business plans.
  • Employers are legally obliged to cooperate with trustees in the provision of relevant information, but can seek confidentiality agreements in respect of information disclosed to them or their advisers.
  • Employers should take steps to ensure that they are able to respond to periodic requests for covenant updates from scheme trustees.
  • The maintenance of a covenant review process can benefit the employer and the trustees, allowing risks to be identified, understood and accommodated more easily.      
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