The employer’s covenant – what trustees can do about it

The Pensions Act 2004 brought into being a new Pensions Regulator and the Pension Protection Fund (PPF). The former told trustees to begin to think like any other unsecured company creditor, in other words like a banker. The latter was required, under the legislation, to base its levy substantially (i.e. to a minimum of 80%) on a risk basis of assessment. At least initially, risk for this purpose is measured by the scale of any deficit and the employer’s creditworthiness.

Trustees and sponsoring companies of schemes with deficits need to commence a dialogue, if they have not done so already, especially if the creditworthiness of the sponsor is other than first class (see June 2006 PMI Technical News). Mitigating the corporate credit risk arising from a pension deficit is an issue for both the trustees and sponsor. This article considers some of the tools available.

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