The Pensions Regulator has published updated guidance on how trustees of a defined benefit (’DB‘) scheme should assess and monitor the financial strength of the employer (known as the “covenant”) and improve scheme security: they are encouraged to understand and “actively manage” the risks being taken.

The review of the employer covenant is not mentioned in legislation, but is a fundamental part of the Regulator’s approach in its Code of Practice on DB scheme funding and employers can expect that trustees will push for the approach in the guidance. This includes a full covenant review to be undertaken at each valuation and for trustees to monitor the covenant regularly in the interim. Where an employer prioritises business needs at the expense of the contributions required by the scheme, the Regulator suggests that it must justify why such investment will benefit the scheme and why the support of the scheme is necessary.

http://www.thepensionsregulator.gov.uk/guidance/guidance-assessing-monitoring-employer-covenant.aspx