On the go: Sponsor longevity is a vital part of covenant assessment, requiring professional judgement and a range of strategic tools, according to a new report by the Employer Covenant Practitioners’ Association.
The ECPA paper, published on Monday, notes that reliance on sponsor covenant can only be ended in one of four circumstances: a buyout, a transfer to the Pension Protection Fund, a transfer to a consolidator or the winding up of the scheme.
Each of these options has its drawbacks making it undesirable for schemes to pursue; or if it is desirable, rendering it can be unattainable. For trustees of schemes where this is the case, monitoring the health of the sponsor is a vital part of discharging their fiduciary responsibilities.
The paper aims to reinforce “how a meaningful assessment of employer longevity, to inform efficient funding and investment decisions, is an important component of employer covenant assessment”.
This is especially so in light of the coronavirus pandemic, but should be understood in the context of long-term structural market trends that make it more likely that, over the multi-decade life of a pension scheme, the nature and health of the sponsoring employer will change.
Measuring employer longevity requires the trustee to consider the employer’s “strategic and competitive positioning and, in the broadest sense, its resource base,” the report stated.
“Practitioners will also need to consider the dynamics of the employer’s sector — and the factors which drive success or failure in the sector.”
It will require a broader rather than a formulaic approach, the report continued, one that considers financial and other forecasts alongside more qualitative information.
“Recognising that employer covenant and its assessment is multi-faceted, the quantitative strategic and other aspects of covenant evaluation should be interwoven so that the covenant adviser develops a comprehensive view of an employer’s financial strengths, strategic positioning and outlook,” the report stated.
Andy Palmer, chair of the ECPA, said the paper “highlights how crucial it is for trustees to understand the potential longevity of employers sponsoring their schemes in formulating both efficient investment strategies and appropriate funding plans”.
“Evaluating and monitoring sponsor longevity cannot be undertaken formulaically: the application of professional judgement and appropriate strategic tools, coupled with robust processes both for monitoring the position and responding to change, are all essential to understanding this central aspect of the employer covenant,” he noted.
