The employer covenant – a hot topic for the man on the street

Published on 18 July 2017

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The relationship between employers and associated defined benefit pension schemes has never been under the spotlight more. It is a hot topic for the media and in Westminster and, whilst the focus of the popular media is on employers doing “the right thing” for employees, behind-the-scenes the pressure on trustees to monitor and negotiate the best outcome for scheme members is ever increasing.

The media perception of the Pension Protection Fund as a soft target is misguided but the prominence of scheme announcements relating to insolvency or RAAs is notable. Only recently, the Hoover scheme announcement hit the national press.

In the wake of the select committee deliberations, it seems that the new government may take steps to increase regulation around corporate activity, particularly where defined benefit schemes could be affected. However, the gatekeeper responsibility for schemes remains with the trustees and it will be ever more important for trustees to keep track of employer covenants and to reassess these on a regular basis, not just when the valuation is carried out.

In particular, trustees will need to assess the impact of the changing economic climate and to regularly review the main features of the employer covenant. Careful review of the TPR guidance is necessary and adapting the covenant review process where, for example, the employer group is or becomes complex or the employer’s attitude to cooperating with the scheme trustees deteriorates.

The trustees should have a clear policy to underpin their covenant review activities. In the same way that the employer has a constantly evolving relationship with the scheme, the trustees may consider whether a relationship with a covenant expert should be developed so that changes within the employer can be examined and anticipated in a proportionate way in real-time rather than one-off exercises on a sporadic basis.

Covenant reviews can be considered as a necessary evil but our experience is that building relationships with covenant advisers at an early stage, before problems occur, enables the trustees and external advisers to build trust and knowledge so that the covenant adviser does not duplicate effort but plans their work to efficiently dovetail in with the knowledge and data already held by the trustees. Intimate knowledge of the relationship between the scheme and the employer enables the covenant adviser to deal sensitively with the relationship issues.

We anticipate that the employer covenant will continue to be hot topic and an area for increased regulation. Trustees may feel the weight of this scrutiny more keenly in future.

For further information please speak with your usual Kreston Reeves adviser here, or contact Andrew Tate here or on +44 (0)330 124 1399.

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