The Pensions Regulator (TPR) has published updated covenant guidance for trustees of defined benefit (DB) pension schemes, aligned with its new DB funding code.
The new guidance provides the market with greater certainty over how TPR expects trustees to assess their employer covenant. It embeds good practice and encourages consistency across schemes.
TPR’s Executive Director of Market Oversight, Neil Bull, said:
“Today’s publication is the last piece of the jigsaw to help schemes carry out valuations under the new DB funding code. For the first time, employer covenant is defined in regulation.
“It’s vitally important that schemes understand that the risk taken on the journey plan to their low dependency target in their funding and investment strategy is supportable by the employer.
"For many, this will bake in best practice, but we expect all trustees to read applicable sections of the guidance in full and make sure their members are protected.”
All core sections of the revised guidance contain important new elements looking at: cash flow; reasonable affordability; maximum affordable contributions; reliability period; covenant longevity; and contingent assets.
The areas of covenant assessment that require the highest level of judgement from trustees now include several worked examples. On contingent assets, there is a focus on how trustees can ensure the support needed for the scheme is provided when required.
There is also an increased focus on proportionality of covenant assessments to ensure trustees consider the right level of detail, based on the covenant support provided and the scheme’s position. TPR expects trustees to use this guidance to review whether their existing covenant analysis is focused in the right areas and remains proportionate, especially if they have experienced a significant change in their scheme funding position in recent years.
Notes for editors
- TPR may revise the covenant guidance when needed and include industry feedback. Comments or queries about the new guidance can be sent to covenantguidance@tpr.gov.uk.
- TPR is the regulator of workplace trust-based pension schemes in the UK. Our statutory objectives are to:
- protect members’ benefits 
- reduce the risk of calls on the Pension Protection Fund
- promote, and to improve understanding of, the good administration of work-based pension schemes
- maximise employer compliance with automatic enrolment duties
- minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only)
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