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Understanding employer covenant requires team work!

Regardless of promises from the government that the recession is over, we all know that in reality things couldn’t be further from the truth.

As the fragile UK economy limps on, the one thing that we can be encouraged by is the rise in corporate transactions. One consequence of this is an increased importance in monitoring employer covenants.

As Simon rightly states in April’s issue of Pensions World, “trustees and employers are coming round to the need to monitor employer covenant and the Pensions Regulator guidance is encouraging just that”.

All trustees should recognise the need to monitor covenant strength, as taking for granted the covenant of a scheme sponsor could have devastating effects on a pension scheme. Increasing communications between trustees and sponsors are now more common place, demonstrating the necessity to forge strong bonds between the key stakeholders.

Following The Pensions Regulator’s guidance in November regarding trustee assessment of sponsor covenant, it seems that many have taken heed. More than ever trustees are delving deeper to fully understand their employer’s covenant and asking how they can develop and introduce better monitoring processes.

The crux of the matter is that trustees need to, at a very basic level, discuss covenant regularly at board meetings, perhaps as a standing item on the agenda. In a recent survey, over a third of trustees said that they only carried out covenant reviews on an annual basis, with the remaining percentage monitoring covenants even less frequently. Statistics like this are obviously worrying, but it is hoped that the increasing focus from TPR will encourage trustees to take that extra step.

In addition, given the improved understanding of the scheme funding process, employers too are now more open to trustee’s need to review covenants or seek assets and are more likely to work with them to limit possible exposure to deficits.

Fundamentally, in order for an assessment of employer covenant to prove effective, employers and trustees must work together. With trustees being given a full understanding about the company and its finances, they can work with the sponsor to most appropriately balance the needs of a solvent employer and a scheme in deficit. Without this collaboration, the less likely it will be that a scheme will reach full funding, or an employer can be treated suitably by a trustee board.

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Category : Employer Covenant — Tags: , , — admin @ 10:54 am April 26, 2011