When The Pensions Regulator’s revised Code of Practice set out Brighton’s view that there should be openness and collaboration between trustees and their sponsoring employers, employer groups such as the CBI welcomed the softer stance of trustees being asked to strike a balance between securing member benefits and the long term sustainability of the employer. This is a far cry from the earlier TPR advice to trustees to take a much more robust line with their sponsor.

Firstly – what is the employer covenant?

In a short article it’s difficult to capture all the components of the employer’s covenant – that will be discussed in future newsletters. Enough to say that the covenant is the sum of the ability of the sponsor to meet the cost of providing the pension promise to members and the willingness of the sponsor to actually do so.

As such the covenant can, and often does, change through economic cycles, think house builders, manufacturing companies although almost all companies are affected by economic and political changes to some extent or another. It follows then that trustees need to understand the sponsors covenant, to be able to understand the sponsor’s future business plan and how external factors can affect this.

The lesson then is for trustees to keep tabs on the employer covenant on a regular basis. Good practice has meant an annual presentation from the sponsor to the Trustees. Best practice is a presentation twice a year, for listed companies tying into financial statements to the Stock Exchange.

Trustees don’t need to be part time finance directors to understand the sponsor’s covenant. Having a trustee who can read a set of accounts is certainly a plus but as importantly it’s about understanding when key contracts are up for review, which areas of business which are struggling or doing better than their competitors and the level of debt the sponsor is carrying.

As trustees we may be asked to sign Non-Disclosure agreements before the sponsor will share understandably market sensitive information There are other factors to consider, which is why there are specialist covenant advisers able and willing to assist trustees measure the sponsor’s covenant. Knowing how as trustees you can help yourself is where you should start before looking for further covenant advice.

Secondly – take a moment

If you think that your scheme could be better prepared for the future, we can help you as we have helped others; see our case studies. Why not contact us to find out more?

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