The Pensions Regulator (TPR) has released revised guidance on employer covenant assessments for trustees of defined benefit (DB) pension schemes, in line with the new DB funding code.
This updated guidance provides clarity on TPR's expectations for evaluating the employer covenant, aiming to standardise practices across schemes while promoting best practices. It introduces several key elements, such as assessing cash flow, affordability, maximum affordable contributions, covenant longevity and contingent assets.
TPR’s Executive Director of Market Oversight, Neil Bull, 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.”
Trustees are encouraged to consider proportionality when assessing their covenant, taking into account the specifics of each scheme, including its funding situation and recent changes. The guidance includes practical examples and emphasises areas that require careful trustee judgment, particularly around contingent assets and ensuring the employer's ability to provide support when needed.
Trustees are expected to regularly review their covenant assessments to ensure they remain relevant and proportionate, particularly in light of any shifts in the scheme's funding position.
The guidance is organised into the following nine sections:
Introduction
Identifying employers
Assessing cash flow
Prospects
Determining the reliability period and covenant longevity period
Contingent assets
Recovery plans
Determining the covenant inputs required to assess supportable risk
Monitoring