XPS Group responds to updated covenant guidance

XPS Group responds to updated covenant guidance

04 Dec 2024

XPS Group says publication of updated covenant guidance allows trustees and scheme sponsors to push forward with long-term strategic planning

With the publication of the updated covenant guidance, the Pensions Regulator (“TPR”) has completed the final piece of the puzzle, following the implementation of the funding and investment strategy regulations and the DB funding code. The overall direction of travel remains the same, building on previous guidance, with increased focus on an integrated approach to risk management, and providing greater clarity of TPR’s expectations of the interaction between covenant, investment and journey planning.

For some schemes, the impact will be limited with greater emphasis on evidence and documentation; for others, it may require a more fundamental change to their approach to covenant and risk assessment.

It will be key to assess covenant early in the process and the first valuation under the new regime will set the tone for the long-term strategy of the scheme. Key areas of focus will include cash flow and appropriate sensitivity testing, the time periods over which it will be reasonable to rely on the covenant, the extent of reliance that can be placed on contingent assets, reasonable affordability and the capacity to support risk.

There is increased focus on the proportionality of covenant assessment to ensure an appropriate level of detail is considered and effective communication between employers and trustees will also be important to address the enhanced information requirements. Transparency can help balance the needs of both parties.

Arabella Slinger, Partner and Head of Covenant at XPS Group said, “We welcome the publication of the covenant guidance and TPR’s engagement with the industry during the process of its development. The guidance will allow trustees and sponsors to push forward with long-term strategic planning. For some schemes, today’s news will represent ‘business as usual’, but others will need to adapt their approaches, with sponsors likely to need to provide more information to trustees to support their assessments. We believe that all schemes will find it helpful now to assess how their covenant fits into the new requirements, before they get too far down the track of setting strategy under the new rules, and then having to turn back.”