Defined benefit trustees need to understand the potential longevity of their sponsor and, given the pace of corporate and sectoral change, should adopt a dynamic monitoring approach, according to a new paper from the Employer Covenant Practitioners Association (ECPA).
Forming a view of and monitoring sponsor longevity is important because of the “very considerable” time horizons over which employers usually need to survive, absent a scheme buyout or consolidator, to ensure members’ benefits are paid in full, according to the paper.
According to the authors, it is important not to stop at the development of a view of an employer’s longevity at a single point in time.
“The ability to monitor longevity and other risks dynamically – and not just once every three years – matters because changes can occur rapidly and have permanent effects on the employer’s ability to meet its obligations to a scheme in full,” the authors wrote.
Measures should be put in place to be ready to respond to both off-plan performance or one-off events or transactions.
The paper aims to highlight the limitations of using a purely formulaic approach to covenant assessment in isolation.
“Indeed,” the authors wrote, “the failure to identify potential changes to corporate longevity assumptions by not forming a rounded forward-looking view, supported by experienced professional judgement, could be disastrous given the nature and importance of scheme funding decisions and the time horizons underpinning them.”
Established in 2012, originally as the Employer Covenant Working Group, the ECPA discuss issues relevant to providing financial advice to clients on matters connected with the employer covenant, participates in discussions with bodies such as the Pensions Regulator and Pension Protection Fund, and seeks to raise standards in the employer covenant financial advisory industry generally.
The paper can be found here.