Jessica BirdThe Pensions Regulator (TPR) has published updated covenant guidance for trustees of defined benefit (DB) pension schemes, aligned with its new DB funding code.
The guidance provides the market with greater certainty over how TPR expects trustees to assess their employer covenant.
It was formed to embed good practice and encourages consistency across schemes.
Neil Bull, executive director of market oversight at TPR, 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.
“It’s vitally important that schemes 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.
“For many, this will bake in best practice, but we expect all trustees to read applicable sections of the guidance in full and make sure their members are protected.”
All core sections of the revised guidance contain important new elements looking at: cashflow; reasonable affordability; maximum affordable contributions; reliability period; covenant longevity; and contingent assets.
The areas of covenant assessment that require the highest level of judgement from trustees now include several worked examples.
On contingent assets, there is a focus on how trustees can ensure the support needed for the scheme is provided when required.
There is also an increased focus on proportionality of covenant assessments to ensure trustees consider the right level of detail, based on the covenant support provided and the scheme’s position.
TPR said it expects trustees to use this guidance to review whether their existing covenant analysis is focused in the right areas and remains proportionate, especially if they have experienced a significant change in their scheme funding position in recent years.
