The Regulator looks to trustees to put mechanisms in place to monitor employer covenant and market conditions, so they can react to changing situations as they happen.

The Regulator has published a consultation document, setting out proposed steps for trustees to monitor and strengthen the employer covenant. The key message is that trustees should be proactive in conducting regular reviews of covenant and should plan ahead to ensure that their scheme can rely on the continuing support of the employer. The Regulator wants trustees to think the unthinkable in terms of how they would crystallise the employer support should that ever become necessary.

The Regulator suggests that this should encompass monitoring the employer’s industry and industry position, making detailed inquiries into its financial position, recognising the scale of its obligations to the scheme relative to its cash flow, understanding its legal obligations to the scheme and the scheme’s position relative to other creditors. A monitoring plan should contain “trigger points” which will prompt the trustees to take action, such as negotiating increases to scheme security in the form of negative pledges, commitments to increase funding, and, where appropriate, contingent asset agreements.

Under the proposals, trustees are encouraged to instruct professional specialists to ensure they can access the relevant expertise to understand and deal with the issues that arise; however they are not required to appoint specialists, nor are they expected to incur disproportionate costs in undertaking monitoring activities. The consultation closes on 7 September 2010.