Covenant reviews need not break the bank

With the Pensions Regulator guiding schemes towards seeking external covenant monitoring, Dalriada Trustees’ Claire McGruer argues it does not have to be an expensive exercise.

It is the trustees’ ongoing responsibility to actively and regularly monitor the employer covenant to ensure they can perform their role effectively on behalf of the scheme’s membership.

Within all pension schemes, trustees should have a framework for assessment and monitoring of the covenant.

Recent regulatory guidance produced by the Pensions Regulator is welcome, but the advice comes with a price tag: “Trustees should ask probing questions to understand the covenant the employer provides for the scheme, and where they have any doubts about their ability to do this, they should engage the right professional help.”

This is all sound advice as many trustees do not have the relevant expertise and therefore require help from a specialist covenant assessor. While this independence and expertise is welcome, it can be an expensive process, ultimately paid for by the employer.

The shift in demand that has occurred since the regulator’s guidance has led specialist assessors and accountancy firms to strengthen their teams to handle the numerous calls from nervous trustees who need to be led through this minefield.

However, before they commit to significant fees on specialist advice, we believe there are many cases where trustees can better utilise these external experts and scale down the costs that go with them. By taking a proactive approach to assessment and monitoring of employer support there are ways to manage costs without compromising on quality.

Based on our own experience, a typical covenant assessment can be broken down into the following key areas:

  • Cover pages, content pages, disclaimers
  • List of information used, glossary, re-statement of sponsor accounts and notes from accounts, clarification of company structure, latest company news, industry comments, reference to Dun & Bradstreet  Assessment
  • View on ongoing monitoring and additional questions to be put to the employer
  • Executive summary

What is significant is that the first two parts of these reports, which require limited expertise, tend to make up at least 70% of the content.
While it varies for each report, these two opening sections can also account for around 70% of the resource that goes into preparing the report.

If trustees are looking to closely manage the assessment process and any related costs they should begin the process early and ensure they fully understand it. They must then be proactive by engaging with the employer over any issues needing clarity.

We would always suggest they start by making a list of the information required; gather this information, chasing up any missing information in the process; collate it and present it in a cohesive manner with any resulting queries being raised with the employer.

The cycle of gathering, collating and presenting is then repeated as necessary.

In adapting this process trustees can, in many cases, cover the core workload of the covenant assessment – around 70% – themselves.

If these steps are taken thoroughly they will be left with well presented information and, as a result, have a good understanding of the situation, putting themselves in a strong position to decide whether or not to attempt the other elements of the assessment or call in expert advice.

If opting for the latter at this stage, the trustees will often find that the expert advice is focused, they are better able to respond in a shorter timeframe than otherwise and, importantly, there should be a significant reduction in the costs.

To sum up, we would always advocate using expert assessors as they can be invaluable in helping trustees understand the current position of the employer covenant for their scheme. However, when the trustees adopt a proactive approach of understanding what is required, the expert advice will be focused on the essential aspects of this work.

This approach should lead to an equally good result but keep a firm lid on costs. The starting point for determining what is the best approach is for the trustees to make an honest appraisal of their own skill-sets and draft in expertise where they identify the need.

Claire McGruer is an independent trustee at Dalriada Trustees.

This article was featured on SchemeXpert.com, published 27th April 2011.

Claire McGruer
Claire McGruer

Claire is an experienced pension trustee with over 25 years industry experience as a consultant. Claire has particular experience of scheme mergers which has included communicating pension changes to scheme members