Katie Lightstone, Partner in Employer Covenant and Restructuring at PwC UK, comments:
“We welcome employer covenant becoming a formal legal concept. Since the 2004 Pensions Act, covenant has been an essential element of understanding the appropriate funding and investment risk and - often even more importantly - in transaction or restructuring situations where the support for the scheme is changing.
“These changes come at an interesting juncture for many trustees and corporates who are seeing better than expected funding positions but also complex challenges to their covenant strength with significant uncertainty in the short to medium term.
“The draft regulations signal a change to the assessment of covenant and steer trustees to do this by reference to the deficit on a low dependency basis which could see more prudent overall outcomes. Corporates may face more of a challenge to evidence the ability of their covenant to support scheme risk. Both trustees and sponsors alike will need to react to these changes when assessing covenant strength and considering an appropriate level of funding and investment risk.”
John Dunn, Head of Pensions Funding and Transformation at PwC UK, adds:
“The draft regulations reveal the next layer of detail on how the long-term funding requirements in the Pensions Schemes Act 2021 will operate, including new statutory definitions of the concepts of ‘scheme maturity’, ‘low dependency investment allocation’, and ‘low dependency funding basis’. Since many sponsors and trustees already have long-term funding plans in place, this extra detail will help them judge how compatible existing plans are likely to be with the new regime.”
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