Trustees should place greater emphasis on covenant reliability amid ongoing geopolitical and economic volatility, according to LCP.

The consultancy urged trustees to consider how external shocks were affecting employer strength and to incorporate this uncertainty into their covenant assessments, highlighting the importance of robust stress testing and regular monitoring.

LCP warned that financial market volatility could simultaneously weaken both sides of the balance sheet, as falling asset values increased scheme deficits while employers faced financial strain.

This dynamic, the firm argued, risked leaving schemes with greater funding needs supported by weaker covenants.

The guidance aligns with the expectations set out by The Pensions Regulator in its 2025 annual funding statement, which emphasised the need for trustees to account for geopolitical and trade uncertainty, as well as longer-term economic shifts such as the energy transition, when assessing covenant strength.

LCP noted that further guidance was expected in the regulator’s 2026 statement, due in the coming weeks.

Under the new defined benefit (DB) funding regime, trustees are required to determine a ‘covenant reliability period’, setting out the timeframe over which they have reasonable certainty about the employer’s ability to generate cash and support the scheme.

This involves detailed analysis of cash flow forecasts, business plans and the level of cash that could be made available to meet scheme obligations.

LCP considered that some schemes may be directly affected by current geopolitical tensions, including the Middle East conflict, particularly for employers operating energy-intensive businesses or relying on supply chains in affected regions.

It added that others may experience more indirect but still material impacts, such as cost inflation, reduced consumer demand, or tighter access to financing.

The firm also pointed to a series of cumulative pressures facing employers, including disruption linked to the Russia-Ukraine conflict, global trade tensions following US tariffs, and the lingering effects of the Covid-19 pandemic.

LCP suggested that domestic cost pressures, such as increases to national insurance, minimum wage rates and business rates, were adding further strain.

The consultancy stressed that covenant reliability remained relevant even for well-funded schemes.

While many schemes no longer have funding deficits, it warned that trustees must still ensure that the employer can support the scheme in adverse scenarios and make good any shortfalls within a reasonable timeframe.

When concerns arise, trustees may need to adopt a shorter covenant reliability period or assume lower available cash levels, the blog noted.

In some cases, this could prompt mitigating actions such as securing contingent assets, accelerating deficit repair contributions, reducing investment risk or reassessing whether a run-on strategy remains appropriate.

LCP partner, Helen Abbott, said that understanding the reliability of covenants was “central to managing a DB scheme”.

She added that recent global events had shown “how quickly circumstances can deteriorate”, with significant and persistent impacts on employer strength.

Abbott also emphasised that trustees who monitored covenant continuously and maintained “open, proactive communication” with their sponsor would be better placed to navigate difficult periods and take decisive action when needed.

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