Trustees need to be alert to volatility in covenant strength, funding and investments

The Pensions Regulator has today published its 2022 Annual Funding Statement covering Tranche 17 valuations (22 September 2021 – 21 September 2022) reminding trustees to be alert to the volatility the current environment may have on covenant strength, scheme funding positions and investments. 

Commenting on the statement, Guy Mander, partner and head of covenant advisory, RSM UK said: ‘These are challenging times for scheme sponsors who are feeling the impact of inflationary pressures, higher interest rates and rising energy prices, as well as other uncertainties arising from the Ukraine conflict, climate change risks, Covid19 and Brexit. It is therefore appropriate that The Pensions Regulator focuses on the need trustees to continue to monitor covenant regularly and maintain an open dialogue with sponsor management, as part of an integrated risk management framework. This will enable trustees to react quickly when necessary to protect members’ benefits. The ongoing focus on ‘covenant leakage’ to ensure schemes are being treated equitably, and on the adoption and appropriateness of long-term funding targets is also welcome’.

The Statement also notes that The Pensions Regulator expects to launch its second consultation on the new draft DB funding code later this year. Mander said: ‘The new draft funding code could bring many changes to the scheme funding framework and we look forward to engaging with the regulator on this and its plans to update its guidance on assessing employer covenant. We also welcome its plans to provide further guidance on how ESG can be factored into covenant assessments, which is an increasingly important area for covenant practitioners.’