DB scheme funding: Pensions Regulator publishes updated employer covenant guidance

The new DB scheme funding code came into force on November 12, 2024, and the Regulator has now published the final part of the new funding regime framework: updated employer covenant guidance for trustees. 

Although the concept of the employer covenant has long been integral to the scheme funding regime, it was first put on a statutory footing when the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 came into force on April 6, 2024.

The new guidance is lengthy but is divided into eight modules covering the following elements of the employer covenant:

• Guidance on how to identify and assess each employer's legal obligations to the scheme and the nature and extent of those obligations. The guidance also addresses issues for trustees to consider in assessing the level of the employer’s continued support and the risk of possible deterioration.
• Assessment of the cash flow of scheme employers. 
• Guidance for trustees on newly introduced aspects of the DB scheme funding code, such as the "reliability period" and "covenant longevity".
• How to factor covenant into a scheme recovery plan, including monitoring the employer covenant and creating a framework to "take proportionate action at the appropriate time".

The Regulator expects trustees to use the guidance to assess whether their existing covenant analysis is focused in the right areas and remains proportionate, particularly if the scheme has experienced a "significant change" its funding position.

The guidance emphasizes the Regulator’s commitment to protecting member benefits and ensuring employer support aligns with the scheme’s risk profile. The Regulator expects trustees to assess the “reliability period” during which the employer can be reasonably depended upon to support the scheme. Trustees should also consider the “longevity period” for which the employer’s support will last. For most employers, the Regulator considers this will not exceed 10 years. Trustees are urged to read applicable sections of the guidance in full and to ensure their scheme members are protected.

While for some schemes, the publication of the covenant guidance will represent ‘business as usual’, others will need to adapt their approach, with sponsors likely to need to provide more information to trustees to support their assessments.