Assessing the strength of the employer’s covenant

Following the Pensions Act 2004 there is a requirement on trustees to assess the strength of the employer’s covenant at the time of the actuarial valuation, and at any time when they might be worried that the employer is no longer a going concern.

In line with the Pension Regulator’s (“the Regulator”) guidance to trustees of a scheme having a deficit that they should negotiate in the same way as would a bank having a large unsecured debt, trustees should obtain a similar report as would a bank on the financial position of a company about which there are concerns.

The typical report which a bank requests when it has concerns over the repayment of its debt is known as an Independent Business Review, or IBR. In a pensions context, this is often referred to as an Employer Covenant Review, or ECR.

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