UK - Pension scheme trustees are reviewing the strength of their existing employer covenants on pension plans on a more regular basis, as a report issued by consultancy Mercer reveals the number of schemes asking for independent covenant reviews has risen to 28%.

Latest details of Mercers's SFO valuation survey indicate there has been a rise in the number of scheme seeking this review from approximately 57 schemes, or 18% last year, to 88, or 28% this year, from 315 schemes, in response to The Pensions Regulator's (TPR) guidance on funding defined benefit schemes.

The study assesses various phases of their valuation process across all industry sectors and indicates the trends of the market as trustees work through the requirement to set scheme-specific funding targets based on a prudent choice of actuarial assumptions.

Of the schemes surveyed, 40% have an active regular covenant monitoring regime in place, and this drills down further to reveal 23% of schemes review the covenant on an annual basis while 17% are reviewing it more frequently.

That said, 15% only review the covenant at each triennial valuation while the survey also showed the remaining 45% of schemes do not actively monitor their covenants and only act when they become aware of an event which could affect the scheme's position, according to Mercer.

Data also shows schemes with UK based sponsors are more commonly carrying out independent covenant reviews - at least 34% of UK plans questioned - than the 21% schemes with overseas sponsors who are acting too.
Harry Sime, principal at Mercer, said schemes are looking at deficit correction trigger of around 10 years far more often than they would have done in the past.

"This suggests that this trigger is not being viewed as a target. Help may have been provided by smaller deficits coupled with trustees and sponsors agreeing to eliminate shortfalls in line with the ‘as fast as the sponsor can reasonably afford' guidance. This could change if sponsors find the economy becomes harder,  said Sime."
Overall, 72% of scheme valuations were seen as collaborative between employer and trustee - although this is lower than the 76% seen in a previous survey - while 4% said they were confrontational and 38% of schemes plan to obtain funding updates more frequently.