The Society of Pension Professionals has published a new “myth-busting” paper around covenant risks in light of the new DB Funding Code.
In a new “myth-busting” paper, the society tackled several covenant-related issues arising from the new DB Funding Code, which came into effect on 12 November.
Private sector DB pension schemes had an aggregate funding surplus of £485bn at the end of October, according to the Pension Protection Fund’s 7800 Index – a record high figure.
Sophia Singleton, SPP president, said: “The SPP’s Covenant Committee is keen to ensure pension professionals are not just aware of new requirements but also have an understanding of the many potential risks and opportunities that the new DB funding regime has created, and this report more than adequately reflects that desire.”
The industry body has sought to address misconceptions such as covenant ceasing to be an issue once a pension scheme has reached low dependency on its sponsoring employer, and the idea that schemes with good funding levels or low funding and investment risk don’t need to look at covenant at all.
It also addresses the “fast track” path for triennial evaluations, stating that covenant should continue to be monitored even if pension schemes are permitted to use the streamlined route to approval from the Pensions Regulator.
The SPP also sought to dispel fears that the DB Funding Code’s new requirements could lead to increased tension between trustees and sponsors over long-term objectives.
In isolation, while the Code’s specific wording could potentially set a low bar for covenant assessment in such circumstances, the SPP said it was clear that trustees would need to carry out a fuller assessment and analysis of covenant risk.
Preparing for a bulk annuity transaction
Another myth the paper addresses concerns risk transfer, with some trustees apparently believing that there is no need to discuss a potential insurance transaction until the employer is ready.
The SPP said setting and documenting a long-term objective for a pension scheme could have employer group accounting implications, particularly for those with US parent entities.
Stating buyout with a pension insurer as an explicit aim could cause some accounting headaches, the report said, which may mean that those employers will be more likely to choose ‘run on’ as their stated long-term objective – at least up until the point that they want to transfer to an insurer.
A sharp pivot such as this could result in compressed timescales for transacting, the SPP warned. Instead, trustees should consider “good housekeeping steps” such as data analysis and cleansing, and strategic planning regardless of the agreed long-term objective.
Further reading
TPR clarifies statement of strategy approach as funding code implemented (23 September 2024)
TPR promises to be ‘reasonable’ over funding code implementation (29 July 2024)
