The support available to a pension scheme from its corporate sponsor is crucial. With the sponsor being the last resort for addressing any risk and problem faced by a scheme, the strength of the covenant plays a key role in shaping its funding and investment strategy.
The amount of reliance that can be placed on a sponsor is fundamental to deciding the pace of the scheme’s funding, the level of prudence to be used in the actuarial assumptions and the level of investment risk a pension scheme can employ to meet its funding requirements over its lifetime.
Trustees cannot assume that their corporate sponsor can always be relied on to bail them out if times get tough. Corporate entities can and do fail, and the risk of corporate failure can change quickly over a very short time horizon. Therefore it is crucial that trustees actively monitor the covenant strength and assess the implications of corporate activities as part of their overall risk management strategy, to give members the best chance of receiving their full benefits.
As we are a full-service pension consultancy, we can provide an integrated service to ensure we not only assess and monitor the strength of your covenant, but also assist you with considering its impact on your investment and funding strategy.