Assessing covenant: detailed guidance
Practical guidance for trustees of defined benefit (DB) schemes on how to assess and monitor the employer covenant as part of an integrated approach to managing scheme risks and taking action to improve scheme security in accordance with the DB funding code.
This guidance will also be of interest to scheme employers and advisers. Read the chapters that are relevant to your scheme and employer circumstances.
Introduction
Overview of the role of the employer covenant and elements to consider when assessing it including proportionality.
Identifying employers
Guidance on how to identify and assess each employer’s legal obligations to the scheme and the nature and extent of those legal obligations.
Assessing cash flow
Guidance on what you should consider when assessing the cash flow of employers, and non-employers, who have a legal obligation to financially support the scheme.
Prospects
Guidance on how to understand the extent and duration of reliance that can be placed on employers to continue providing sufficient scheme support and highlight risks to that support deteriorating.
Determining the reliability period and covenant longevity period
Guidance on assessing the reliability period and covenant longevity, both of which are new concepts introduced in our DB funding code and underpinned by legislation.
Contingent assets
Guidance on how to approach ascribing an appropriate value to a contingent asset, and, therefore, evidence that it is sufficient to provide the specified level of support when required.
Recovery plans
Guidance on how to assess the employer’s reasonable affordability for recovery plan purposes.
Determining the covenant inputs required to assess supportable risk
Guidance on how to determine the appropriate covenant inputs needed to assess if the level of risk being run in the scheme’s funding and investment strategy is supportable by the covenant.
Monitoring
Guidance on how to monitor the covenant and create a framework to take proportionate action at the appropriate time.