PwC responds to TPR’s new Employer Covenant Guidance

Commenting on The Pensions Regulator’s new Employer Covenant Guidance, Katie Lightstone, Pensions Employer Covenant & Restructuring Partner said: 

“The new DB covenant guidance provides trustees and sponsors with the final missing ingredient to enable them to fully understand the impact of the new DB funding regime on their scheme. Trustees will need to find a balance between the application of over 100 pages of further guidance and the varying requirements for the Statement of Strategy, when in many cases schemes are already well-funded with a sensible existing long-term strategy. 

“An area of particular interest is how the guidance addresses various non-standard guarantees, many of which have been hard-won by trustees. The guidance requires trustees to have ‘reasonable certainty’ over the value of a guarantee, particularly when it is not a ‘look-through’/full solvency guarantee. This requirement is likely to increase the burden on schemes to carefully evaluate and justify the value attributed to such guarantees.

“Trustees grappling with ‘reasonable certainty’ over covenant reliability may find the case studies helpful, but must still weigh a broad range of factors—from market outlook to net-zero transition risks. 

“With all schemes legally required to assess and confirm that their covenant is ‘adequate’ for the scheme’s risk levels, the key will be to approach the exercise sensibly and in a practical way which is helpful on an ongoing basis.

“We expect the new covenant approach to spark deeper conversations between sponsors and schemes. Sponsors will need clarity on key covenant metrics to inform their own position in funding discussions, and we anticipate more sponsors may set out their own conclusions for trustees to ‘diligence’.”