A “surprisingly large” number of trustees have limited confidence in the strength of their sponsoring employer, a survey from LCP has suggested, revealing that nearly half of respondents thought they could not rely on the employer’s survival for more than five years.

In contrast, around 1 in 3 respondents thought that they could depend on the strength of the employer covenant for ten years or more.

Whilst scheme funding levels have generally improved considerably since last year’s survey, LCP warned that where a scheme sees a combination of a funding shortfall and weak employer covenant, it could face big challenges in ensuring member benefits are paid in full.

LCP also suggested that the role of employer ‘covenant’ is set to become increasingly important as The Pension Regulator (TPR) introduces a new Defined Benefit (DB) Funding Code, which encourages schemes to place less reliance on the long-term survival of their sponsor when coming up with journey plans.

Under the new rules, trustees seeking to incorporate a reliability period of more than six years into their journey plan will be expected to provide a strong rationale for why they view their covenant to have a particularly long and stable outlook relative to most.

The increased importance of covenant in the new funding regime was reflected the survey, as LCP found that around a third of respondents expect to devote greater attention to covenant issues, with some appointing an independent covenant adviser for the first time.

Commenting on the findings, LCP partner and covenant specialist, Francesca Bailey, stated: “In the new DB funding regime, it is especially important that schemes embrace the concepts of covenant reliability and visibility when drawing up their long-term journey plans.

“The regulator’s general view is that schemes should not rely on the long-term strength of their sponsor to underpin their plans, but our survey shows a surprisingly high number of schemes who have limited confidence in the reliability of their sponsor’s cash generation even in the relatively short-term.

“Although most schemes have enjoyed improvements in their funding position in recent times, there will still be many whose ability to achieve target funding levels requires the ongoing support of their sponsor, and a realistic assessment of the strength and durability of that sponsor covenant is increasingly vital.”

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