UK - New guidance for trustees on monitoring employer support for the pension scheme has been devised as a web-based product and replaces the separate contingent assets guidance from the Pension Regulator (TPR).

The consultation on the draft guidance, which advocates a “proportionate” approach from trustees toward covenant assessment and monitoring, states that trustees need to monitor employer risk as closely as they do fund performance. 

TPR has included practical examples such as case studies in the revised guidance to aid trustees’ understanding of how and when to take appropriate and proportionate action in relation to the employer covenant.

It also provides checklists of useful information and is complemented by an online e-learning module for trustees and a short online guide tailored toward employers.

The regulator warned the employer covenant was “a crucial element in protecting members’ benefits”.

Some of the areas covered by the draft guidance include:

Understanding a group’s legal structure and an employer’s legal obligations Valuing alternative forms of scheme security Appointing external covenant assessors

However, when considering the use of contingent assets, the draft guidance advises trustees to check the assets are acceptable to the Pension Protection Fund (PPF) should they need to use them to reduce the PPF levy.

It also noted that contingent assets can be “expensive to manage” and that trustees “need to allow for these costs when considering their acceptability”.

Bill Galvin, acting chief executive of TPR, said: “Where trustees rely on an employer to underpin the risk of adverse outcomes, they must fully understand the strength of that promise by the employer, including how it will be realised, and in what circumstances.”

But he added: “Assessing covenant and establishing appropriate levels of security carries a cost for schemes and employers.

“Nothing in our guidance is intended to promote costs disproportionate to the benefits.”

Ben Harris, an associate at Barnett Waddingham, said: “Although a lot of the themes included in the guidance are not new, the guidance provides trustees with a more focused approach on how to conduct covenant assessment, with specific examples of actions they should carry out.

“The regulator’s clarification on a proportionate approach to covenant assessment will be of comfort to trustees.”

Lorant Porkolab, senior consultant at Punter Southall Transactions Services, said: “It is clear covenant assessment will stay on the Regulator’s agenda, continue to be a key consideration for trustees in transaction situations and play an essential role in the actuarial valuation process.

“However, it appears one-off assessments once every three years - and complete ignorance of covenant issues between them - may not suffice any longer.”

Meanwhile, TPR has also published its revised guidance on internal controls to help improve corporate governance.

The guidance covers a range of risk areas, such as deterioration in the employer covenant, conflicts of interest, relations with advisers and record keeping.

The consultation on the guidance for monitoring the employer covenant will close on 7 September.

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