On Thursday 13 August 2015 The Pensions’ Regulator (TPR) published the first in a series of updated guides for trustees of Defined Benefit (DB) occupational pension schemes. The new guides are being released in light of the updated DB funding code of practice. The focus of this latest guidance is to assist trustees in their duty to ‘assess and monitor the employer’s covenant, the employer’s legal obligation and financial ability to support their scheme’ (TPR press release). The previous guidance had not been updated since 2010.
The guide leaves trustees in no doubt as to how crucial it is for them to fully understand the employer covenant, particularly when valuing the scheme. This is in line with the code’s principle that trustees must take an integrated approach to risk management.
The updated guidance has been positively received by those in the industry, particularly for its pragmatic and proportionate approach. It acknowledges that schemes will not necessarily require regular external covenant reviews and encourages trustees to consider how much work is required depending on the strength of the covenant. Trustees are being urged to use this new guidance as a ‘handbook’ and in particular to help them decide:
- who should assess the covenant;
- what a proportionate approach should look like;
- how the covenant should be assessed in the context of the scheme;
- how to monitor the covenant on an ongoing basis and prepare contingency plans to react appropriately; and
- what to consider to improve the security of the scheme.
To assist with this, TPR has included alongside the guidance case studies, checklists and scenarios, making the document much more user-friendly for trustees, sponsoring employers and advisers. It is hoped that the guidance due to be published later in the year relating to integrated risk management and investment strategy will have the same or a similar structure.
Fundamental to this process will be the collaboration of the trustees and the employer, with both being pushed by TPR to work openly. It is the view of TPR that good information sharing can reduce the need for detailed covenant investigations and spending on advice. Sponsoring employers are also likely to welcome this guidance due to the focus on compromise between securing a scheme’s position and the need for an employer to grow. In addition, TPR concedes that it may be appropriate for trustees to place some reliance on employers that do not have a legal obligation to support the scheme on a short term basis, as this is a key source of funding for many schemes.
It is clear from this guidance that TPR has taken on board feedback from trustees, and those in the pensions industry when producing this document. This level of engagement, and the result, is highly encouraging. Though some trustees may be faced with an increased workload in the short term following this publication, it is likely that this will lead to far less onerous covenant reviews in the future.