Helen Abbott, Partner in LCP’s Covenant team, commented: "It's good to see TPR's long awaited update to its covenant guidance finally published today which will bring much needed clarity. There are no real surprises in it given the extent of covenant content in the new DB Funding Code published earlier in the year, but the further detail and examples will help trustees and employers understand more fully TPR's expectations. It's also worth remembering that whilst the guidance is heavily related to scheme funding valuations, this does also set the framework for how covenant is assessed for corporate events such as M&A activity. For example, this means that trustees will need to take into account the impact that a transaction could have on their employer's reliability and longevity periods."
Arabella Slinger, Partner and Head of Covenant at XPS Group said: “We welcome the publication of the covenant guidance and TPR’s engagement with the industry during the process of its development. The guidance will allow trustees and sponsors to push forward with long-term strategic planning. For some schemes, today’s news will represent ‘business as usual’, but others will need to adapt their approaches, with sponsors likely to need to provide more information to trustees to support their assessments. We believe that all schemes will find it helpful now to assess how their covenant fits into the new requirements, before they get too far down the track of setting strategy under the new rules, and then having to turn back.”
Alex Beecraft, head of Covenant and Security at Aon in the UK, said: “The new covenant guidance confirms a regulatory shift in how the health of the sponsor is measured and its strategic implications. Change always brings unexpected consequences and stakeholders should engage early with the new requirements to understand their impact and set the agenda for future negotiations. Sponsors will have to grapple with increased information sharing requirements while trustees will need to clarify how undertakings such as guarantees support their scheme. Thankfully, there is still ample flexibility to be pragmatic and to find appropriate solutions. As more schemes explore endgame choices, covenant advice will become central to these decisions. For the many sponsors that can demonstrate a sufficient expected lifespan, near-term insurance is not the only option for trustees to deliver financial security to their members. This has the potential to improve outcomes for members and sponsors alike.”
Katie Lightstone, PwC, Pensions Employer Covenant & Restructuring Partner said: “The new DB covenant guidance provides trustees and sponsors with the final missing ingredient to enable them to fully understand the impact of the new DB funding regime on their scheme. Trustees will need to find a balance between the application of over 100 pages of further guidance and the varying requirements for the Statement of Strategy, when in many cases schemes are already well-funded with a sensible existing long-term strategy. An area of particular interest is how the guidance addresses various non-standard guarantees, many of which have been hard-won by trustees. The guidance requires trustees to have ‘reasonable certainty’ over the value of a guarantee, particularly when it is not a ‘look-through’/full solvency guarantee. This requirement is likely to increase the burden on schemes to carefully evaluate and justify the value attributed to such guarantees.
“Trustees grappling with ‘reasonable certainty’ over covenant reliability may find the case studies helpful, but must still weigh a broad range of factors—from market outlook to net-zero transition risks. With all schemes legally required to assess and confirm that their covenant is ‘adequate’ for the scheme’s risk levels, the key will be to approach the exercise sensibly and in a practical way which is helpful on an ongoing basis. We expect the new covenant approach to spark deeper conversations between sponsors and schemes. Sponsors will need clarity on key covenant metrics to inform their own position in funding discussions, and we anticipate more sponsors may set out their own conclusions for trustees to ‘diligence’.”
David Brooks, Head of Policy at Broadstone, said: “Today’s update from The Pensions Regulator (TPR) is the missing link to complete the new Defined Benefit funding code for pension schemes. Trustees, schemes and their advisers now have full guidance on how the regulator will expect them to assess employer covenant with the aim of developing a consistent approach across the market. The latest guidance carries on in a similar vein to the wider funding code as good schemes will already have a handle on their covenant albeit may need to refine their metrics and monitoring. For others this should be the prompt they need to ensure good understanding of their covenant and the ability to support long term strategy. The sense of proportionality was noted along with the relevance of scheme size (in absolute and relative terms) together with the reliance on the sponsor.”
TPR publishes revised DB covenant guidance
|
