Defined benefit (DB) pension scheme professionals believe covenant risk is on the rise due to global volatility, according to LCP.

In an LCP poll of pension professionals, just 8 per cent felt that covenant risk had declined over the past 12 months.

Meanwhile, 38 per cent of respondents reported a moderate increase in perceived risk and 11 per cent cited a more significant increase.

The webinar examined the impact of wider macroeconomic and geopolitical pressures, including unrest in the Middle East.

It focused on how heightened uncertainty is affecting employer covenant and the challenges this presents for trustees, as they undertake valuations in the new DB funding regime, and plan for the longer term.

Under the new funding regime, trustees are required to determine a ‘covenant reliability period’, setting out the timeframe over which they have reasonable certainty about the employer’s ability to generate cash and support the scheme.

According to LCP partner, Helen Abbott, the poll results were unsurprising.

“It’s critical that trustees understand how much they rely on the employer and how that could change in future,” she said.

“Trustees are having to navigate this period of uncertainty while also facing growing demands to give clear views on key covenant metrics, such as confirming how long their covenant reliability period is, which means they need to understand how much their employer could be impacted.”

This means closely monitoring covenant, having clear contingency plans, and working collaboratively with sponsors.

She added: “Done well, this enables schemes to stay flexible and manage risk better, even when there is such significant macroeconomic uncertainty.”

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