In a statement this week, The Pensions Regulator (TPR) has again highlighted the issue of employer support for DB schemes.

This statement sets out the regulator's expectations of trustees when assessing the employer's covenant, and builds on last June's focus on scheme funding and covenant. The regulator's research and casework experience has shown that whilst some schemes take a sound approach, for others improvement is still necessary.

Aries comment

Perhaps this is inevitable in any regulatory regime, to the degree that compliance is perceived to be voluntary and the risk of pro-active investigation by a regulator correspondingly low. Ultimately, a lot depends on the credibility of the regulator and acceptance of the regime as fair and reasonable by the regulated community. This applies to TPR and the FSA just as much as to any governing body.

As with other recently-updated guidance (see Aries article), in this new statement TPR is picking up the cosh. Trustees are expected to improve their understanding of the support that the sponsoring employer provides for their scheme, by:

• asking probing questions - and seeking professional help if in doubt;
• objectively assessing the employer covenant in the context of risk and volatility;
• having a framework for assessment and monitoring of employer covenant, approaching the task proportionately;
• preparing plans for realising employer support, should it become necessary; and
• in the case of multi-employer schemes, having a good understanding of employer covenant and the liabilities of employers and other guarantors.

This amounts to more than just preparing a policy document. In an accompanying press release, TPR's acting chief executive Bill Galvin said

"Most trustees will need to monitor the strength of their sponsor's covenant on an ongoing basis and all should have a very good idea of exactly how they might respond in different scenarios. This means they require a good knowledge of the sponsor's business, agreed trigger points for action, and clear options on how to act to increase scheme security. Monitoring the covenant can be as important as monitoring investment performance".

By the end of July, we will see consultation documents on

• new guidance for monitoring employer support; plus
• guidance for trustees of multi-employer schemes.

Guidance on monitoring employer support will provide more information on what trustees should do to measure and monitor employer covenant. It will also outline action trustees should take to strengthen scheme security if needed as a consequence of these assessments. It will provide guidance on how contingent assets and other arrangements can work alongside employer covenant to provide further safeguards.

Guidance for trustees of multi-employer schemes will explain the importance of understanding who is legally responsible for supporting the liabilities in a multi-employer scheme; assessing the strength of the covenant supporting the scheme; and the options for mitigating the risk associated with the departure of an employer from the scheme. The guidance covers all the mechanisms which may apply when an employer departs a multi-employer scheme, including the two alternatives (see Aries article) introduced by the DWP in April 2010.

The statement also notes that TPR will be "calling on trustees to play a more active role in guarding against transfers which may not be in members' best interests". This refers to increasingly-common enhanced transfer value (ETV) exercises, in which DB scheme members (often deferreds) are offered an employer-funded top-up to their CETV to transfer to a money purchase arrangement, or a lump sum; or sometimes both.

Following the focus on covenant issues, TPR will be producing revised guidance on transfer incentives. This will replace the current 'inducements' guidance, published in January 2007 (see Aries article) and set out a principles-based approach to the issue. It will also cover other situations in which members are asked to consider substituting or converting their benefits.

This is arguably overdue, particularly in the wake of the critically-received speech by TPR Chairman David Norgrove last December. In saying then that "if a company is willing to encourage the transfer, the company's gain is likely to be the member's loss", he appeared almost to deny that ETV exercises could be 'win-win' situations. While continuing to warn that transferring out may not be in the member's best interests, this week's more nuanced statement calls for employers who offer incentives for members to transfer out of DB schemes to provide members with the information and access to impartial advice that they need to make their mind up.

The three forthcoming publications will be supported by 'bite-sized' e-learning tools to help trustees.

Update 15 June