Atkin trustees, actuaries, consultants & administrators

Current Issues - August 2015

TPR guidance on covenant assessment: New guidance for trustees and employers on how to assess the company’s covenant. This highlights the need for Trustees to have a thorough and well documented process for evaluating the covenant. This does not automatically mean obtaining an independent third party review and the guidance highlights some of the dangers of doing so. We would suggest that the Trustees and Sponsor work through a structured process with their advisors to understand the covenant from the Scheme’s perspective. This should be an interactive process which gives the Trustees sufficient information to understand the covenant, the main risks and how these might impact on the scheme. They will then be in the best possible position to allow for the strength of the employer covenant sensibly and know what risks need monitoring between valuations. If there are then areas which are particularly complex or problematic the Trustees can obtain advice but it will be much more targeted.

Other points to draw your attention to;

1. Focus should be on entities with a legal obligation to support the scheme

2. Sponsors must be able to underwrite the risk (including unhedged interest rate and inflation risk)

3. The covenant can change quickly. Trustees should monitor the covenant between valuations and have contingency plans so they can take decisive action if and when required.

4. Carefully assess affordability and if the Trustees are to accept greater investment in the sponsor, does this have any direct benefit for the Scheme

If you are contacted by the TPR about the covenant, this is likely to focus on; a. Management of any conflicts b. Trustee decisions to specific risks c. Quality of decision making process d. Approach to covenant assessment (including whether an independent review might be appropriate) e. Approach to contingency planning,

In the current environment especially, Trustees should take care when allowing for market conditions (in particular, any assumptions around gilts reverting to a higher level) and they should consider the potential impact of the new DC flexibilities on member behaviour (for instance, the number of transfers might increase or members may take less tax free cash).

Government consultation on changes to the tax regime: The Green Paper includes the idea that pensions should be taxed like ISAs i.e. contributions are taxed but growth and benefits are paid out tax-free. With the introduction of pension flexibilities, the Government has shown that it is not afraid of making sweeping changes with little warning. Moving to an ISA approach would, of course, increase the amount of tax employees and employers pay now – for instance for a higher rate tax payer, pension costs would increase by 40%. The consultation ends next month and we would encourage you to take part.

Ceasing to contract out: DWP have backtracked on allowing Trustees to change the Scheme rules in response to the cessation of contracting out so any changes must be carried out consistently with the Scheme Trust Deed and Rules. This may involve a longer and more involved consultation process with the sponsor and members. Schemes should consider how this might impact on their timetables for making the change.


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I have worked on a number of schemes with Atkin Trustees Limited and with Richard Bryant in particular. I found them to be a very organised team who focus on achieving practical and cost efficient solutions.

Michael M Jones, Partner, Charles Russell LLP