Employer Covenants research project

Background

The Institute and Faculty of Actuaries is commissioning a research project on the topic of how employer covenants are best taken into account when assessing the capital supporting Institutions of Occupational Retirement Provision (IORPs).

The impetus for this project is provided by the review of the IORP directive and in particular by the Holistic Balance Sheet (HBS) option. This was described in the consultation document issued on 25 November 2011 by the European Insurance and Occupational Pensions Authority (EIOPA) in its draft advice to the European Commission.

Rationale

The rationale for the project is to further the understanding of the issues surrounding, and the practicalities of expressing, “reliance on employer covenant” as a single figure in a HBS.

The project should also examine what information relating to the assessment of covenant is already accessible to trustees.  This should include information on how intangible assets are valued in balance sheets such as brand, goodwill etc.

We envisage that a member of the Profession will work closely with the successful applicants to facilitate access to relevant information and contacts and to ensure that the questions addressed are relevant to the review of the IORP directive.

Questions to address in the research

• What are the desirable qualities of a covenant assessment methodology for the purpose of managing and regulating an IORP?
• How could the frequency of covenant assessments/monitoring be optimised?
• What are the key features (including pros and cons) of the different approaches that are currently used and that might be adopted in future? In particular:
• to what extent do they possess the desirable qualities?
• what are the implications for standard setters?
• how can they be adapted tobe proportionate for small scheme and small sponsoring entities?
• what are the potential implications for compliance costs?
• How do ratings agencies use the publicly available data in company accounts to assess and rate company debt?
• What additional information do lenders seek and how do they assess how much to lend?
• What additional information, over and above that used to assess debt, would be needed to assess the security of a company’s pension promise bearing in mind the typical differences in term between these obligations?
• Are there intrinsic differences between the employer covenant per se, and the value of the covenant that is available to the pension scheme and if so, can they be identified and measured?
• How do companies assess their own financial strength? (For example how is enterprise value established in merger and acquisition work?) How do analysts assess the impact of a DB pension scheme/liability on the value of i) the equity and ii) the debt of acompany? Does this offer any insights into how an employer covenant could be valued for the purpose of financing pension schemes?
• What potential areas of conflict with accounting principles are there in valuing the covenant?
• What extra issues arise in groups of companies and multinationals (i.e. when companies have option to move funds across jurisdictions)?
• Are there useful lessons to be learned from the work going on for IFRS4 in insurance accounting?
• Do other countries have data sources and processes that it would be useful to replicate in the UK for the purpose of covenant assessment?

We anticipate that the European Commission will ask EIOPA to conduct a Quantitative Impact Assessment on the introduction of a HBS approach in the autumn of 2012.  We would like to use the outputs of this research to input into this exercise hence the tight timetable. We therefore would need to have an interim report to the Actuarial Profession (in a form yet to be decided) by 5 October  2012. The final report would need to be presented at the Actuarial Profession's sessional research events in Edinburgh and London in January 2013 and for subsequent publication in one of the Profession's journals.

Please note that you should specifically address the additional requirements when completing the application form.

The Actuarial Profession has initially allocated up to £40,000 for this project. We are happy to receive proposals that require funding greater than £40,000 (as we may be able to work with you to secure additional funding) but in such a circumstance we would also wish you to indicate how you would reduce the scope of the research to bring the funding level below £40,000.  We would welcome project proposals that can bring additional funding or resources from other bodies such as research councils or companies and in such a circumstance this information should be included in the proposal.

For frequently asked questions relating to this call please click here. For further information or an informal chat please contact Pauline Simpson in the first instance.

Application Process

In order to apply download the application form.  When completing the form you should include a description on how you would carry out the research and include a detailed research plan with milestones and outputs. You are also advised to view the outline of our standard contract.

Once the form is completed  submit your proposal by 17.00 BST on 15 June 2012 . Email applications are preferred.

Pauline Simpson, Research Project Manager, The Actuarial Profession, 4 Worcester Street, OXFORD, OX1 2AW, Tel: 01865 268237