A need for flexibility and transparency

The importance of the employer covenant as highlighted by the Pensions Regulator.

The Pensions Regulator (tPR) has recently issued a statement on the need for consideration of the employer covenant in setting prudent funding targets and appropriate recovery plans for defined benefit (DB) pension schemes.

While the economic pressures on employers may be greater, the message for trustees is essentially the same. They must continue to undertake an objective assessment of the employer covenant, setting technical provisions at a level that is appropriate to the covenant’s strength.

“TPR has been consistent in its advice that funding targets reflect the relative strength of the employer covenant,” says Darren Masters, principal and head of covenant consulting services at Mercer. “The message is that while a high-funding target might put pressure on the employer, if the covenant strength justifies it, then the funding target is appropriate.”

However, there is an acceptance from tPR that the lower levels of funding, coupled with the pressure exerted on employers, is likely to produce higher deficit levels. Therefore there will need to be flexibility in the length of recovery plans.

According to Darren, tPR is looking for greater collaboration between pension scheme trustees and employers. The two parties should work together to produce realistic funding targets and affordable recovery plans.

“The obligation is on trustees to negotiate a realistic target,” he says. “However, there is also an onus on employers to take a much more proactive approach, come to the table early with any problems, and highlight potential deficits in the pension scheme and propose how they plan to deal with these. There has to be transparency from both parties in the current circumstances.”

To access the statement from tPR visit: The Pensions Regulator - Employer Covenant Statement PDF, or for further information, contact your local Mercer consultant or e-mail Mercer Foresight

The benefits of good record-keeping

Guidance from The Pensions Regulator (tPR) on record keeping should be more than a tick-box approach, as Foresight reports.

“If trustees focus on the outcomes and benefits, implementing tPR guidance on record keeping will be a worthwhile investment, rather than a cost,” confirms Geraldine Brassett, principal at Mercer.

Commenting on tPR’s guidelines on record keeping introduced earlier this year, Geraldine says it is clear the Regulator will be focusing more on how schemes are administered. This means trustees need to have administration as a higher priority item on their governance agenda.

“Good data is an asset to a pensions scheme although it’s been recognised for some time that the investment has not always been made in correcting data,” says Geraldine.

The guidance outlines a number of recommendations, aimed at improving the service to members, driving higher levels of automation and reducing overall risk.

The guidance falls into three areas:

• Common data – applicable to all schemes
• Conditional data – dependent on scheme type, structure and design
• Numerical data – an aid to understanding results.

“The regulator has specified this is about record keeping and not just data,” adds Geraldine. “Wider than just data held on a computer system, it includes paper records, microfiche, microfilm and any other media that might be out there.”

Geraldine warns against trustees and administrators approaching the guidance as a mere “tick-box” exercise. “If implemented with the desired outcomes in mind, the benefits to trustees are potentially numerous, and success can be measured.”

Whether administered in-house or by an external provider, Geraldine says the guidance puts the administration of schemes much higher up the trustees’ agenda. “This has to be good for the trustees who are ultimately responsible for the administration of schemes. It brings to the table conversations about the quality of the data, whereas up until now, administrators may have been living with and compensating for data issues. It also enables discussions about data that is held which is non electronic.”

To find out how Mercer can help with the implementation of this guidance, e-mail Mercer Foresight