Back in June of 2010 The Pensions Regulator published a statement for trustees of defined benefit pension schemes. The memorandum details guidance for managing employer covenants and the best way to support a scheme.
The Pensions Regulator has been very careful to outline exactly what is expected of a trustee in the role of overseeing an employer covenant.
Every trustee should monitor the strength of their sponsor's covenant regularly. Having this 'hand in' to a scheme will give trustees the knowledge and tools to respond to any given scenario. A trustee should understand the sponsor's business and set in stone 'trigger points' for agreed action.
Trustees should consider:
- How they measure and monitor their sponsored covenants
- Assessment measurements, benchmarks and action plans for recovery
- Look into ways to strengthen schemes and safeguard the assets
- Understanding who is responsible for multi-employer schemes and the liabilities
An employer covenant enables a trustee to manage defined benefit pension schemes and ensure that the finances are safe guarded. Without an employer covenant and regular monitoring, a scheme can have problems that have not been foreseen or planned for.
As a trustee you are required to understand everything about the financial standing of a company and outline a plan of action for all possibilities including what will happen to the scheme if the company becomes insolvent. By carrying out regular covenant reviews, a trustee can make provisions for all eventualities as well as seeing the opportunity to actually save the company money.
Many small schemes are managed by company directors who assume the role of trustee as they feel that they know more about the business than anyone on the outside could ever. Although there are clear benefits to this, there is always the problem of being too close to actually assess a scheme properly and ask those changing questions, that only a professional would.
Although there is an obvious cost assigned to enlisting the help of a professional, this is often a small price to pay for the financial security of your defined benefit pension scheme.
Regardless of the size of a scheme, a trustee must carry out regular employer covenant reviews and ensure that all those involved in the scheme are safe guarded against possible deficits.