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Presenting Employer Covenant

Pension scheme sponsors will be aware that as a result of the recent economic turmoil, trustees are more focused on their requirement (stated by the Pensions Regulator’s code of practice) to assess the strength of the employer covenant as part of the scheme funding process. This has also been further emphasized  in recent statements from the Pensions Regulator.

Trustees, concerned about their sponsor’s future financial strength or stability, are asking for more information and greater detail than ever before, and in many cases they are advised on the sponsor covenant by a third party.

At Punter Southall we advise both employers and trustees on covenant reviews and have in-depth knowledge of the issues faced by both parties. For employers, this can also be a difficult area to navigate and they too can benefit from expert guidance; we can make representations to the trustees in all areas of the covenant review.

We focus on what is of key importance both to the trustees and to the Pensions Regulator (typically the short-term security and long-term prospects of the sponsor) and address any covenant issues in relation to that.

Our sponsor covenant experts can help employers:

• Understand the trustees’ obligations and perspectives so that employers can represent the strength of the employer covenant correctly and as the Pensions Regulator intended and avoid excessive prudence in the scheme funding process
• Understand the trustees’ requirements so that the right information is released in a timely and helpful way, and assist the sponsor to maintain a good relationship with the trustees
• Encourage the trustees to limit the importance given to short-term trends which tend to cause an overreaction to current events
• Answer questions posed by trustees to senior management and provide explanations that suits the purpose of the covenant assessment
• Highlight strengths within the financial policy, capital structure and cash flows that may be not straightforward or obvious to the trustees or their advisors
• Show strengths that come from capital investment in the business and the benefits that this investment provides to the future covenant provided by the sponsor
• Negotiate with the trustees or their advisors on covenant related issues, including the technical provisions and recovery plans for the pension scheme
• Apply for Clearance from the Pensions Regulator and present the company’s case, including the appropriateness of the agreed mitigation to compensate the scheme for any weakening of the covenant

The end goal is to agree with the trustees a more accurate level of prudence in the valuation which secures affordable contributions without stifling future growth plans.

For further information contact Lorant Porkolab by email or on 020 7004 0074.