The Pensions Regulator issues new guidance on monitoring covenant and security for pension schemes

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28 June 2010

The Pensions Regulator has issued new guidance for trustees on monitoring covenant and security for defined benefit pension schemes.

The Pensions Regulator's new guidance on covenant monitoring and security says that DB trustees should:

- be more structured and proactive in the way they assess and monitor the employer's covenant, and

- make sure they have the machinery in place - through contingent assets, for example - to protect the scheme before the employer's financial position deteriorates significantly.

Trustees - and employers - should seriously consider working to the new guidance even though it is only a consultation draft.  It is the fullest statement TPR has issued so far on covenant assessment and monitoring.  It has lots of useful ideas.

For employers, the guidance brings out the extra room for manoeuvre that security like contingent assets can give the trustees over the contribution schedule and recovery plan.

The guidance calls on trustees to:

  • carry out a full covenant review before each triennial valuation,
  • have a clear plan for monitoring the covenant year by year by assessing key business performance indicators and setting specific triggers to act e.g. when they should seek contingent assets (like charges and guarantees) as security or re-assess their investment strategy,
  • have covenant as a standing item at every meeting, and
  • understand that covenant is a legal as well as a financial issue e.g. so they know the extent of their potential recourse against the assets of different group companies, either directly or through TPR's moral hazard powers.

For "Guidance on monitoring employer support: covenant, contingent assets and other security", click here.

The consultation ends in September.

In its recent statement "Understanding employer support for DB schemes", TPR also said it will soon be issuing draft guidance on monitoring covenant in multi-employer schemes.  To see the statement, click here.

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