When the outlook keeps changing, how can trustees make informed decisions about the future security of their employer covenant support?

My colleague Jon Wolff recently set out how covenant can support a run-on and surplus-sharing strategy through LCP’s STAR framework. The R in STAR is for ‘regular covenant monitoring’ and this article focuses on how trustees can tailor their approach to monitoring to the risks that matter most for their employer and scheme. It’s a balance, keeping things proportionate but doing enough to be comfortable that signs the employer covenant is deteriorating will be picked up in a timely way. All the more challenging when there’s so many things making the outlook uncertain for many employers.

Just when the outlook starts to look clearer, the landscape changes again 

Recent months have brought another reminder of how quickly the business environment can shift, both in the UK and globally. Energy prices rose sharply, then eased, then rose, then eased again. Trade tensions have shifted. Supply chains remain exposed. Geopolitical risks persist. And in the last few weeks concerns about AI have escalated.

The challenge for businesses is not dealing with one risk in isolation, it’s the uncertainty created when several risks all land at once: higher costs, weaker demand, disruption to supply chains and tighter financing conditions. Everything together creates an environment of uncertainty that makes medium term business planning much more difficult.

The challenge for trustees is understanding how all this impacts their employer covenant, and how concerned they should be about it. Even where schemes are well funded, trustees often still rely on continuing employer support. They need to understand what could weaken that support, by how much, and how quickly things could change.

Trustees and employers are now thinking further ahead

For many years, covenant discussions focused on a simple question: how quickly can the employer afford to fund the deficit? But that question is now relevant for only a minority of schemes that still need a recovery plan.

The debate is broader now, with a growing number of schemes approaching full funding. Trustees and employers are considering whether to run on and release surplus, options that require a longer-term view of employer strength.

Looking at the future covenant is also a key theme for the Regulator in the new funding regime, where trustees are asked to give views on the future reliability and longevity of their employer covenant.

But there is no single “covenant risk” to monitor and covenant risks can’t be looked at in isolation from a scheme’s funding position and investment strategy. Trustees need to understand the risks that matter most for their own employer, and how these covenant risks can interact with the scheme’s funding and investment risks. An integrated approach is essential.

Risk can build in unexpected ways

Some risks can be difficult to mitigate: global conflict, trade restrictions, sharp market movements and extreme weather can create disruption with little warning.

Trustees do not need to be able to predict every event. But they do need to understand where the employer is most vulnerable and how it could respond. They also need to be aware that some risks will not only impact the covenant, they could also have a negative impact on the pension scheme, increasing its reliance on future support from the employer at the very time the covenant is deteriorating.

The key covenant risks will differ between employers, but risk indicators frequently include:

• Reliance on a small number of key customers or suppliers
• High debt levels
• Exposure to energy, commodity or currency movements
• Reliance on overseas operations or vulnerable supply chains
• Cyber resilience and business-continuity plans

A business can look healthy at its most recent year-end, but still have risk exposures that need monitoring year-round. LCP’s Accounting for Pensions 2026 report highlights how geopolitical uncertainty, energy security and supply-chain disruption have become more frequently identified business risks. That is why covenant monitoring should be forward-looking rather than relying on historic financial results.

Questions trustees should ask now

Trustees cannot control global events or systemic risks. But they can implement a proportionate approach to monitoring the potential effect on the employer and their scheme. 
Not every scheme needs a detailed review of every risk. A well-funded scheme with a strong and diversified employer may need only light-touch monitoring. A scheme that relies more heavily on employer support, or faces greater funding and investment risk, will need closer oversight.

That means asking practical questions:

• What are the employer’s most important business risks
• Which risks could materially reduce profits, cash flow or asset values?
• How concentrated are customers, suppliers, funding sources and operations?
• What would happen if a key risk crystallised?
• How much financial headroom does the employer have
• What information and monitoring would give an early warning?
• What action could be taken if conditions deteriorate materially? 

Engaging directly with the employer and discussing their views on key risks and what steps they have and can take to mitigate them is a great first step.

This covenant information can then feed into the integrated approach to monitoring: covenant, funding and investment should not be looked at in isolation.

What should trustees do next?

• Keep it practical, proportionate and current
• Take a proactive approach rather than a reactive one
• Ensure you have the right information at the right time – review information sharing and notifiable event protocols regularly
• Understand potential downside scenarios
• Consider pre-agreeing triggers for mitigating actions to take place
• Keep an open dialogue with the sponsor so that both parties can respond quickly if circumstances change

The outlook may improve, then worsen again, or vice versa. Not all changes need to prompt action. Trustees do not need to react to every headline. But they do need to know which risks could materially change their employer’s ability to support the scheme, and when these do look likely to occur, have a plan for what to do next.