Trustees of pension schemes are taking a more pro-active and in-depth approach to reviewing their sponsoring employers covenant, according to recent data released by Mercer. The evidence is that employers and trustees are acting in response to advice from the Pensions Regulator. Generally, employers have agreed to stronger technical provisions for funding, while trustees are seeking assets outside the scheme and longer recovery plans to cover any shortfalls.
Mercers annual survey also shows an increase in the number of schemes regularly reviewing their employer covenant, with more than half carrying out reviews at least annually. The survey also highlights an increase in the use of contingent assets as trustees attempt to balance scheme funding requirements and the ability of organisations to contribute. Both actions come in response to a higher risk of corporate insolvency.
The SFO Valuations Survey analysed 257 schemes with average assets of GBP 149 million across a wide range of industry sectors. According to the data, there has been an increase in the frequency with which the employer covenant is monitored. Employer covenant is the term used to describe a companys willingness and ability to contribute to the pension scheme. Sixty percent of schemes now have a regular covenant monitoring regime in place. In the 2009 survey, 27% of schemes now review the covenant on an annual basis and 26% do so more frequently. This compares with 2008, when 23% of schemes reviewed the covenant on an annual basis while 17% reviewed it more frequently.
Just over a quarter of scheme trustees in the 2009 survey commissioned an independent covenant review. This is similar to the proportion from the 2008 survey and an increase from only 18 percent in 2007. A further 45% of schemes now obtain additional data beyond what is publicly available, or seek employer presentations on the covenant. Only 2% intend to carry out no covenant analysis at all.
Recent company insolvencies have given the covenant a much higher profile, says Alison Pollock, a principal at Mercer and the author of the survey report. Both trustees and employers involved with the schemes in the survey commented on how the valuation process had helped them understand the importance of the covenant to the schemes funding position.
D.C.