The Defined Benefit (DB) Funding Code has reaffirmed the enduring relevance of employer covenant, the Society of Pension Professionals (SPP) has said in a paper examining how covenant assessment is evolving under the revised regime.

In its Covenant Facts, Fiction, and First Principles report, the SPP revisited a number of perceived 'myths' about the code and argued that covenant remained central to funding and endgame strategy decisions.

The paper stated that, just over a year into the new DB Funding Code, the landscape had shifted from initial apprehension to what it described as a more “nuanced, opportunity-led environment”, with a broader range of strategic options now available to schemes.

However, it stressed that covenant was not a ‘box-ticking’ exercise, and that its relevance did not diminish as schemes approached low dependency.

Instead, it argued that the role of covenant advisers had evolved, with greater recognition of covenant’s importance in shaping overall scheme strategy.

Among the key themes highlighted in the report was proportionality, with covenant work increasingly being “right-sized” so that the depth of analysis reflected the scheme’s actual reliance on the sponsor, rather than being driven purely by regulatory process.

The SPP also cautioned against the over-reliance on single regulatory metrics.

While the new one-in-six-year value-at-risk (VaR) test over the reliability period provided a regulatory baseline, the report warned that no single metric could fully capture scheme risk and that professional judgement remained essential.

It further emphasised the benefits of collaboration, noting that valuations tended to run more smoothly when trustees, sponsors, covenant advisers, actuaries and investment advisers engaged early and openly under the new regime.

In addition, the paper highlighted the potential value of flexibility in a volatile economic environment, suggesting that trustees should not feel compelled to rush into long-term strategies purely for compliance reasons, as a more measured approach may deliver better outcomes for both members and sponsors.

The report also directly challenged the notion that covenant 'no longer matters' once a scheme reached low dependency.

It stated that trustees continued to benefit from proportionate, regular covenant monitoring, even for well-funded and low-risk schemes, and that most advisers were adept at scaling their work to match levels of reliance.

SPP Covenant Committee co-chair, Adrian Bourne, said: “This latest SPP paper accurately highlights that the new funding regime hasn’t changed the fundamentals of covenant - but it has shone a brighter light on them.

"Good covenant advice is not about ticking boxes; it’s about translating risk into a shared language that helps trustees, sponsors and advisers make better strategic decisions."

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