The Pensions Regulator (TPR) has published guidance materials to help trustees to monitor employer support for consultation, which has been received with praise from the industry for its timeliness.

The guidance includes practical help such as case studies to help trustees’ understanding of how to take appropriate and proportionate action, and features checklists of information to aid assessment of the financial strength of employers or covenant assessors.

It covers issues such as the importance of measuring covenant, understanding a group’s legal structure and an employer’s legal obligations, what to consider when assessing the employer’s financial position, alternative forms of scheme security, when to appoint external covenant assessors and the importance of regular monitoring of covenant.

“Where trustees rely on an employer to underpin the risk of adverse outcomes, they must fully understand the strength of that promise by the employer, including how it will be realised, and in what circumstances,” commented Bill Galvin, acting chief executive at TPR.

“Assessing covenant and establishing appropriate levels of security carries a cost for schemes and employers; nothing in our guidance is intended to promote costs disproportionate to the benefits.”

The Regulator’s emphasis on the need for regular covenant assessment and monitoring has been welcomed by the industry, with Punter Southall congratulating the new element of the guidance that trustees not only put a covenant monitoring framework in place, but also include appropriate contingency plans that could be triggered depending on changes in the relevant covenant metrics.

Lorant Porkolab, a senior consultant who leads the Covenant Advisory practice of Punter Southall Transactions Services (PSTS), said: “It is clear that covenant assessment will stay on the Regulator’s agenda, continue to be a key consideration for trustees in transaction situations and play an essential role in the actuarial valuation process. However, it appears that one off assessments once every three years – and complete ignorance of covenant issues between them – may not suffice any longer.”

Porkolab added that Punter Southall expects to see more trustees considering the impact of the covenant strength on the scheme’s investment strategy.

Sacker & Partners LLP partner, Robin Simmons, added: “I expect the industry will respond positively to the draft, which should prove to be a very useful reference point for trustees when considering how to assess and monitor sponsor covenant and associated risks.”

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