Co-authored by a number of ECPA practitioners, the paper seeks to emphasise the importance of considering sponsor longevity as a key component of an employer covenant assessment; to highlight the professional judgement required in doing so; and to explain the value of a dynamic monitoring approach around sponsor longevity – given the pace of corporate and sectoral change.
Andy Palmer, Chair of the ECPA said: “This paper highlights how crucial it is for Trustees to understand the potential longevity of employers sponsoring their schemes in formulating both efficient investment strategies and appropriate funding plans.
“As the paper explains, the relationship between a scheme and its employer(s) only ceases on the occurrence of one of four events: a buyout of the liabilities by an insurance company; the transfer of the liabilities to the Pension Protection Fund (“PPF”) upon an insolvency of the employer; a transfer of the liabilities to a pension scheme “consolidator”; or, following run-off, through the payment of the last liability to a member and the subsequent winding up of the scheme.
“Many schemes and employers cannot – at least in the short term – afford a buyout. The buyout market itself has finite capacity. The consolidator market is in its infancy. And a scheme going into the PPF is unlikely be an optimal outcome for members given benefit curtailment. All of this highlights the importance of forming a view of – and monitoring – sponsor longevity in scheme decision-making.
“Evaluating and monitoring sponsor longevity cannot be undertaken formulaically: the application of professional judgement and appropriate strategic tools; coupled with robust processes both for monitoring the position and responding to change, are all essential to understanding this central aspect of the employer covenant. ECPA members are well-placed to support Trustees in this key area.”
Time horizons and the employer covenant: the importance of evaluating sponsor longevity as part of a dynamic analysis
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