Covenant services
The strength of the employer's covenant impacts on every trustee funding and investment decision. We help trustees to reach an objective assessment of the employer’s financial position and prospects. We also ensure that trustees understand how to reflect the findings of our reports in the actuarial valuation process, when setting up a plan to recover the deficit in the pension scheme, and when discussions take place regarding investment strategy.
The Pensions Regulator states that trustees should regard the employer's covenant for their pension scheme as: "… the obligation and the ability of the employer to support the scheme, protecting against both short term and long term risks" and also recommends that "trustees should regard [assessing and monitoring the strength of their covenant] as just as important to the security of the scheme as monitoring fund performance".
Our Covenant Service meets trustees' needs in this difficult area whilst also taking account of funding and investment implications. The service covers the sponsor's ability to financially support the pension scheme and helps trustees perform their duties by providing you with clear analysis and recommendations.
Our approach to covenant projects is based on three core aspects; (i) an assessment of covenant strength, (ii) consideration of how best to strengthen the covenant, and, (iii) establishing a proportionate monitoring program to keep up to date with changes in the financial strength of your covenant.
Our service helps trustees understand:
- The effect of the employer's corporate group structure
- The employer's ability to meet ongoing demands for funding as they fall due
- The employer's ability to stand behind any adverse experience in an ongoing situation, including the investment risk taken by the scheme
- What would happen if their sponsoring company became insolvent
- What options there are to obtain security for the scheme e.g. in the form of contingent assets
- How to plan for deficit recovery - how much can the employer reasonably afford to pay into the scheme? We help you take account of the balance between what the scheme requires and what the company can afford, and consider competing demands for cash; pension scheme funding, the capital expenditure needs of the business, and shareholder dividends.
Having undertaken an initial assessment of the covenant it is important to stay in touch with future changes in covenant strength. As the Pensions Regulator has stated, a proportionate monitoring programme is vital and may even give the trustees a strong negotiating position if the financial strength of their covenant deteriorates. We can help you establish such a monitoring process.
LCP Prudence Index
Participate in LCP's Prudence Index and benchmark your funding strategy against other pension schemes.
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