Today the Pensions Regulator published its most comprehensive guidance yet on how trustees should assess the strength of their sponsor.
The document is not necessarily a change of direction in the way TPR looks at covenant and is very much how we approach assessment. The key points are:
- covenant is the legal obligation and financial ability to support the scheme
- investment and funding risks taken should reflect covenant
- assessment should be forward-looking
- for affordability schemes should be treated equitably with other stakeholders
- consider external help where difficult to self-assess or challenge objectively
Argyll comment:
TPR has had input from a range of trustees and practitioners and the result, in our view, is a very practical and helpful guide reflecting more than 10 years of covenant assessment experience. There are useful case studies to help put the theory into practice and specific considerations for not-for-profits and multi-employer schemes.
Trustees will find useful the discussion around whether to self-assess or not. Many of our new clients over the past 18 months have used an external covenant adviser for the first time. This latest guidance highlighting the potential complexity and pitfalls of assessment will no doubt convince further boards to seek external help.