Research has indicated that pension scheme trustees are heeding the Pensions Regulator's (TPR) advice in taking a more pro-active and in-depth approach to reviewing their sponsoring employer's covenant, says Mercer.

The financial consultant said all the evidence points towards this positive sign, and employers have also agreed to stronger technical provisions in general for funding. Trustees, Mercer said, are looking at assets outside the scheme and longer recovery plans as a way of covering any shortfalls.

Mercer's annual survey, the SFO Valuations Survey, shows there has also been an increase in the number of schemes that regularly review the employer covenant, with more than half of them carrying out annual reviews, if not more regularly (27 per cent on an annual basis, 26 per cent more frequently). There is an increase in the use of contingent assets as trustees strive to balance funding requirements and the ability of organisations to contribute. An increased threat of corporate insolvency has been identified as the cause for this response.

"Recent company insolvencies have given the covenant a much higher profile," commented Alison Pollock, a principal at Mercer and author of the report covering the survey. "Both trustees and employers involved with the schemes in the survey commented on how the valuation process had helped them understand the importance of the covenant to the scheme's funding position."

The 2008 survey showed that 23 per cent of schemes reviewed covenants on an annual basis, and 17 per cent more frequently.

"The evidence is that trustees are far more conscious of the cost that increasing longevity could place on the scheme. They are interested in understanding how their scheme's experience compares to the standard table they adopt for valuation purposes," Pollock continued.

Sixty-three per cent of schemes also reported that they had reached agreement on the basis of assessing their technical provisions. Half of the 257 schemes surveyed are targeting a funding level equivalent to between 76 per cent and 91 per cent of the funds required for an insurer buy-out, and the average target funding level was 83 per cent, up from 69 per cent in 2008.

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