Atkin trustees, actuaries, consultants & administrators

Covenant Advisory

The ability of the employer to cover the downside risk of the pension scheme is key to both agreeing a suitable recovery plan and investment strategy. We believe it is only by looking at all three elements together that schemes can design a strategy that fully reflects the risks the scheme and sponsoring employer are exposed to.

Traditional covenant reviews often focus on the high level company risks and finances without examining those specific to the scheme and how those specific risks can be managed and mitigated. Our team works closely with both the employers and the trustees to ensure that all parties understand the strength of the company covenant and how it interacts with the scheme.

This allows investment strategies to be designed that take into account the funding position, the employer’s ability to cover the downside risks as well as avoiding locking a surplus into the scheme.

We believe that the scheme benefits most by having a strong employer standing behind it. We therefore see the priority for recovery plans to focus on:

  • preventing leakage from the company which is not matched by payments into the scheme.
  • ensuring that the schemes have protection in a wind-up situation by having priority access to assets, however these assets can otherwise be used to generate profits for the company.
  • regular monitoring and open dialogue with the company so issues can be addressed quickly.

We can assist employers and trustees by:

  • taking both parties through a simple covenant handbook that allows them to understand the main risks and how that might be mitigated.
  • taking a lead in the covenant discussions and avoid any inappropriate anchoring of views.
  • pulling the covenant advice in with both the investment strategy and funding plan to ensure that all parties understand how these interact and how they can be best structured to ensure that both the employer and scheme are in the strongest possible position.
  • focuses on the overall long term funding plan and so avoids tendency of placing too much weight on short-term trends which can cause an overreaction to current events.
  • exploring the use of contingent assets and conditional funding arrangements as part of the recovery plan.
  • answer questions and provide explanations appropriate to the scheme.
  • provide a report that can be submitted to the Pensions Regulator as evidence of a covenant review being carried out.
  • put in place simple monitoring procedures based on the main risks, along with mitigation strategies.

On a personal note, I would like to thank you for your professional yet friendly approach. Always astute and never stuffy, however busy you undoubtedly get. Your innovative nature is an added bonus; Scheme Hub is excellent. I enjoy working with you and when you consider our interaction concerns pensions, that is saying something!

Lee, Administration and Actuarial client