PA April 2021 Employer Covenant
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The Pensions Regulator’s proposal that covenant visibility is only three to five years for most schemes has caused concerns that reliance on the covenant may be watered down. Laura Blows considers the implications of a change in covenant emphasis and how schemes determine covenant time horizons.
The Pensions Regulator’s (TPR) DB funding code proposals has been subject to much debate, particularly with regards to its fast track or bespoke funding options. But the code’s viewpoint on the time horizon of employer covenant visibility has also generated conversations.
While the DB Funding Code of Practice consultation document does not contest that trustees of schemes with stronger employer covenants can afford to take more risk and so assume higher investment returns, it states that it thinks it is “inappropriate to assume indefinite reliance on the covenant” and instead “this should be limited to the period over which there is good covenant visibility”. The document proposes that “for most schemes, practical considerations will limit visibility to three to five years (and sometimes less)”.