Pensions Regulator urges trustees of defined benefits schemes “get to grips with the employer covenant”

18 June 2010

The Pensions Regulator (“Regulator”) has recently published a statement for trustees of defined benefit schemes entitled: “Getting to grips with the employer covenant”. Key points raised in the statement are:

• Trustees should ask probing questions to properly understand the covenant the employer provides for the scheme, and where they have any doubts about their ability to do this, they should engage the right professional help.
• The covenant should be assessed objectively.
• All trustees should have a framework for assessing and reviewing covenant, including monitoring.
• Trustees of multi-employer schemes need a good understanding of the employer covenant and the liabilities of employers and other guarantors.
• Trustees and employers should prepare plans for realising the employer support standing behind a scheme, should this become necessary.
• (The Regulator) expects trustees and employers to act proportionately in approaching covenant assessment and monitoring.

The Regulator has also stated: “…we will also be calling on trustees to play a more active role in guarding against transfers which may not be in members’ best interests.”

Further guidance promised
The Regulator is due to publish a series of new guidance documents for consultation in the coming weeks on the following topics:

Monitoring employer support in order to ensure that trustees measure and monitor the employer covenant.

Guidance for trustees of multi-employer schemes which will explain the importance of understanding who is legally responsible for supporting the liabilities in a multi-employer scheme; assessing the strength of the covenant supporting the scheme; and the options for mitigating the risk associated with the departure of an employer from the scheme.

Each of the three guidance documents will be subject to the usual 12 weeks consultation period.

For a copy of the statement please click here.

Comment
The statement and the guidance to be published shortly are not statements of the law and there is no penalty for failing to comply with them. Nevertheless, the statement and the guidance will be taken into account by the Regulator, a court or tribunal, if they are relevant to what is being decided.

The Regulator suggests that trustees seek professional advice when necessary in assessing the strength of the employer covenant. He highlights the need for trustees to understand the covenant in the context of a group of companies legal structure and the employer's legal obligations. Hill Dickinson’s pensions team has experience of advising trustees on employer covenants and this area of law in general.