Pensions Conference 2011. Review of Workshop B2: Covenant in practice
| Speakers: | Darren Masters, Mercers; Adrian Bourne, Towers Watson |
| Reviewed by: | Claire Dudley |
Covenant: how much work is appropriate?
The session looked at how covenant assessment has changed over time; in particular tPR now has an increased focus on legal obligation rather than willingness and on the governance of covenant. Covenant is important: much more Trustee time is often spent looking at investment risk of individual assets but the amount of money at stake if the sponsor defaults can be far greater than investment risk in a well diversified fund.
Sponsors now seem to be more proactive and often actively provide information to Trustees, defend the level of affordability and put forward asset and liability management solutions. Trustees should also be more proactive particularly following a deterioration in covenant and should have an action plan set up based on appropriate triggers.
As part of the discussion around the subject, one delegate raised the interesting point that the Trustees’ duty is to comply with the law rather than tPR and the law doesn’t mention covenant at all so why should Trustees spend time looking at covenant? In addition, tPR’s powers haven’t really been tested yet – so far the threat of a Financial Support Directive is the furthest tPR has gone. However, the safest course of action is still to follow tPR’s guidance.