Many trustees work collaboratively with the sponsoring employer to make sure that they are taking appropriate decisions regarding assumptions and any recovery plan contributions, and that the long-term affordability of the scheme is sustainable.

After all, it is the employer who has to meet any shortfall in the funding.

However, where an employer is weak, is suffering financial difficulties, or it is difficult for the trustees to fully understand the future business plans, the trustees should consider carrying out a formal review of the employer’s finances – an Employer Covenant Review.

A Covenant Review is essentially a detailed, forensic review of the employer’s financial position, business plans, cash flow, financial projections, debtors and creditors, shareholders, etc. The objective is to provide the trustees with a clear understanding of the employer’s position and its current and future expected financial strength. This in turn allows the trustees to negotiate future funding and contribution payments at an appropriate level.

A strong employer is theoretically able to make higher payments to the scheme, both now and in the future, but in turn, the financial security derived from a strong covenant provides the trustees greater freedom and flexibility around the investment decisions and length of the recovery plan. For instance, trustees may decide to take a more risky investment approach, with agreement from the employer that it is underwriting this additional risk.

Conversely (and rather perversely), weaker covenants will push the trustees towards using more prudent assumptions, safer investment strategies and shorter recovery plans. In fact, these decisions will add to the immediate funding costs of the scheme and therefore potentially weaken the employer further, but the Pensions Regulator will expect the trustees to do this. A formal review report will help both the trustees and the employer to better understand the ability of the employer to meet the contributions and negotiate and agree an affordable and sustainable recovery plan.

At Accountants 4 Pension Schemes our specialist team of experts can undertake covenant reviews for pension scheme trustees. We will review the sponsor’s legal obligations to the scheme, looking at the insolvency priorities and where the trustees feature if the sponsoring employer struggles in the future. We would also look at the sponsor’s financial position both currently and in the future. We would look at historical financial and future projections for the company including the effect of future pension obligations, and consider the key factors affecting financial performance of the sponsoring employer.

We will present our findings to the trustees in a written report.

To get a quote for an Employer Covenant Review, click below to get a quote or call a member of our specialist team on 01474 853856.

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