DB pension trustees encouraged to adopt 'dynamic' corporate longevity monitoring

Defined benefit (DB) pension scheme trustees must ensure that they use a dynamic approach to evaluate and monitor corporate longevity, according to a paper published by the Employer Covenant Practitioners Association (ECPA).

The paper, entitled Time horizons and the employer covenant: the importance of evaluating sponsor longevity as part of a dynamic analysis, sought to emphasise the importance of considering sponsor longevity as a key component of an employer covenant assessment.

It outlined a variety of tools and techniques that trustees can use to keep an eye on sponsor longevity, but warned that using a "purely formulaic" approach to assess covenants had distinct limitations and may lead to missing changes to employer longevity.

It warned that this in turn “could be disastrous given the nature and importance of scheme funding decisions and the time horizons underpinning them”.

As an alternative to these formulaic approaches, the paper recommended considering financial and other forecasts alongside qualitative information, while it also outlined four analytical tools that trustees could use during the non-financial aspects of an assessment.

The paper also emphasised that trustees need to put in place measures to ensure that they are ready to respond to “both off-plan performance or one-off events or transactions”.

It added that this dynamic approach, rather than simply monitoring longevity and other risks every three years, was important as changes that could affect an employer’s ability to meet its obligations to the scheme in full.

ECPA chair, Andy Palmer, said: “This paper highlights how crucial it is for trustees to understand the potential longevity of employers sponsoring their schemes in formulating both efficient investment strategies and appropriate funding plans.”

He highlighted the importance of “forming a view of – and monitoring – sponsor longevity in scheme decisions-making” by pointing out that many schemes could not afford buyouts, the finite capacity of the buyout market, the current state of the consolidator market and the advantage of avoiding the Pension Protection Fund.

Palmer concluded: “Evaluating and monitoring sponsor longevity cannot be undertaken formulaically: the application of professional judgement and appropriate strategic tools; coupled with robust processes both for monitoring the position and responding to change, are all essential to understanding this central aspect of the employer covenant.

“ECPA members are well-placed to support trustees in this key area.”

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