UK - Rating agency Standard & Poor's has launched a service for UK pension scheme trustees, which it says enables them to independently gauge the default risk of the sponsor.
Its new ‘sponsor covenant assessment’ aims to offer a way for trustees to understand the financial strength of sponsoring companies, as required in the draft codes of practice relating to the UK’s Pensions Act.
Mapping the sponsor's credit rating or rating estimate to historic default data, the service is meant help trustees determine the optimum period for eliminating fund deficit.
It said “This service also considers the prospects for the sponsor and the industry in which it operates; the exposure of the company to the scheme; the sensitivity of the company's rating to changes in its capital structure; and potential support from a group or parent company.”
In March last year S&P unveiled a star rating system for UK DB schemes.
Today’s launch follows research by S&P of the 500 largest UK defined benefit schemes, which the agency says suggests that trustees take little account of a sponsor's financial strength in determining scheme funding or investment policy. This is despite the recent spate of high profile corporate failures in the UK.
For the largest UK companies with DB schemes, the assessment will be based on the company's S&P credit rating.
For smaller firms with DB schemes but without full credit ratings, estimates will be quantitatively derived, mainly drawn from S&P’s Credit Risk Tracker, a risk information service which covers about 350,000 UK companies.
"Trustees having to cope with the new codes of practice are lacking independent information about one of the key risks facing their fund - that is the credit or default risk of the scheme sponsor,” said Aidan O'Mahony, head of European pension services.
He also said the new product will “better arm” trustees in their negotiations with sponsors about funding levels allowing advisers to factor in credit strength more accurately in their funding advice.