8 - Employer support and the development of the sponsor covenant concept

Summary

The need to incorporate the ‘sponsor covenant’ and to take account of the impact of corporate events on the pension scheme’s position has long been implicit in trustee decision-making. However, it is really only in the last five years that this has been explicitly a key agenda item for trustee boards, not least through the encouragement and formal pronouncements of the Pensions Regulator (TPR). Having a framework for assessing and reviewing the covenant is now an integral part of good scheme governance because it puts trustees in a good position to make appropriate decisions about scheme funding and corporate events which may affect the employer’s ability to fund their scheme.

With trustees increasingly expected by TPR not just to establish a framework to monitor the sponsor covenant, but also to have a ‘seat at the table’ alongside the company’s other major stakeholders, the relationship between the trustee board, the employer and third parties has changed. We consider in this chapter how the concept of the ‘sponsor’ or ‘employer’ covenant and the changes in relationships and expectations placed on trustees are affecting scheme governance.