The Pensions Regulator (TPR) has published updated covenant guidance for trustees of defined benefit (DB) pension schemes, in alignment with its new DB Funding Code.

The new guidance is intended to provide the market with greater certainty over how the regulator expects trustees to assess their employer covenant, embedding good practice and encouraging consistency across schemes.

Although TPR's new DB Funding Code officially came into force last month (12 November), industry experts were still awaiting the final details from the employer covenant guidance.

Given this, the TPR executive director of market oversight, Neil Bull, said that the new guide is the "last piece of the jigsaw to help schemes carry out valuations under the new DB funding code".

"For the first time, employer covenant is defined in regulation," he continued. “It’s vitally important that schemes understand that the risk taken on the journey plan to their low dependency target in their funding and investment strategy is supportable by the employer.

"For many, this will bake in best practice, but we expect all trustees to read applicable sections of the guidance in full and make sure their members are protected.”

Broadstone head of policy, David Brooks, also highlighted the update as the "missing link" to complete the new funding regime for DB pension schemes.

"The latest guidance carries on in a similar vein to the wider funding code as good schemes will already have a handle on their covenant albeit may need to refine their metrics and monitoring," he stated.

“For others this should be the prompt they need to ensure good understanding of their covenant and the ability to support long term strategy. The sense of proportionality was noted along with the relevance of scheme size (in absolute and relative terms) together with the reliance on the sponsor.”

The revised guidance includes "important" new elements in all of its core sections, including looking at issues around cash flow, reasonable affordability, maximum affordable contributions, reliability period, covenant longevity.

In addition to this, the areas of covenant assessment that require the highest level of judgement from trustees now include several worked examples.

The guidance includes new comments around contingent assets as well, with a particular focus on how trustees can ensure the support needed for the scheme is provided when required.

There is also an increased focus on proportionality of covenant assessments to ensure trustees consider the right level of detail, based on the covenant support provided and the scheme’s position.

TPR said that it expects trustees to use this guidance to review whether their existing covenant analysis is focused in the right areas and remains proportionate, especially if they have experienced a significant change in their scheme funding position in recent years.

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