New funding regime means a different approach to covenant that ticks the right regulatory boxes and is tailored to scheme needs

The new DB funding regime and Covenant guidance means that schemes need to have tailored and focused advice to ensure that they meet the new requirements for valuations, according to LCP who have launched a new service to respond to the changing regulations.

A critical component of the regime is the assessment of employer covenant — the extent to which the employer and any suitable contingent assets can support the scheme, now and in the future, and the risks to this support being available when needed. Under the new rules, trustees are now expected to make clear, prescribed and documented conclusions about covenant strength and include these in an integrated way when considering a scheme’s journey plan.

While The Pensions Regulator (TPR) has emphasised that covenant assessments should be proportionate, its revised guidance is extensive and includes detailed modules and worked examples, making it clear that trustees will need to engage with these requirements. For some schemes this will be a lot more work, particularly if they’re taking a more Bespoke route and have complex covenant arrangements. But all trustees will need a different approach to covenant assessment even if their scheme is well-funded.

In response to this, LCP have launched a new streamlined service to ensure that trustees are getting the best and most proportionate and relevant covenant advice for their scheme. LCP have identified common characteristics between schemes and grouped them into three categories:

• Low risk/small scheme
• Fast track compliant: no recovery plan
• Fast Track compliant: recovery plan needed

The new streamlined service first identifies the key characteristics of the scheme and employer to ensure tailored advice, focused on the key issues to deliver the support each scheme needs.

Whilst schemes with more complicated structures, greater levels of covenant reliance, longer journey plans and those taking a Bespoke approach will still need more tailored and focussed advice sitting outside of the streamlined service, LCP’s new approach aims to make independent covenant advice more accessible to many who need it to comply with the new regime.

Helen Abbott, Partner at LCP, said:

“The new regime rightly places greater emphasis on long-term planning and covenant support. But for many trustees, especially those with limited budgets or smaller schemes, the volume of guidance and new terminology can be overwhelming.”

Jonathan Wolff, Partner at LCP, added:

“Our new streamlined approach is designed to help trustees of schemes with certain characteristics meet their obligations efficiently and with confidence, without losing sight of the nuances that matter for their scheme.”