Covenant (Pensions) meaning

In this issue: Funding and investment Scheme governance Pension scams and liberation Daily and weekly news alerts Dates for your diary Trackers Funding and investment TPR publishes revised employer covenant guidance to align with new DB funding code of practice The Pensions Regulator (TPR) has at last issued revised guidance on the employer covenant for trustees overseeing defined benefit (DB) pension schemes, to align with its new DB funding code of practice, which took effect on 12 November 2024 under the Pensions Act 2004 (Code of Practice) (Defined Benefit Funding) Appointed Day Order 2024 (SI 2024/1143). Described by TPR as ‘the last piece of the jigsaw to help schemes carry out valuations under the new DB funding code’, the update introduces the first regulatory definition of employer covenant, intended to deliver greater market certainty and foster consistency between schemes. Notable changes cover cash flow analysis, tests of reasonable affordability, maximum affordable contributions, reliability periods, covenant longevity, and...

In this issue: Funding and investment Members and benefits Types of workplace pension schemes The Pensions Regulator Pensions dashboards Daily and weekly news alerts Dates for your diary Trackers Funding and investment TPR calls for endgame strategy shift as it publishes Annual Funding Statement 2025 The Pensions Regulator (TPR) issued its Annual Funding Statement (AFS) on 29 April 2025 for trustees and sponsoring employers of occupational defined benefit (DB) pension schemes, the first to sit under the new DB funding code introduced in November 2024. The statement sets out TPR’s expectations for the reformed regime and is most relevant to schemes with valuation dates from 22 September 2024 to 21 September 2025, now described as Tranche 24/25 (T24/25) to align with the calendar year, having previously been intended as Tranche 20 (T20). In appendix 1, TPR provides further clarification on its December 2024 guidance on assessing the employer covenant, and appendix 2 explains how trustees...

What is the background to TPR's updated covenant guidance? TPR issues guidance that accompanies its Codes of Practice, signalling how it expects stakeholders to meet legislation it oversees. Unlike the Codes, this guidance is not formally approved by the Secretary of State; however, it is: an indicator of TPR’s likely enforcement stance; and persuasive before the courts, though not legally binding, so it remains material when tackling any regulatory matter. The covenant guidance addresses how to assess the employer covenant during the triennial valuation of a DB pension scheme. Trustees must conduct that valuation at least every three years and, in most cases, agree it with the employer, as required by PeA 2004, Pt 3. Historically, covenant-related guidance flowed from trustees’ duties to adopt appropriate valuation assumptions and, in doing so, to identify scheme risks and adopt a prudent approach to them. The strength of the covenant—namely, the employer’s capacity to continue supporting the scheme—is a pertinent risk in that assessment...

Practice Note for UK defined benefit (DB) occupational pension schemes This Practice Note is archived and is not maintained. It reviews the Pensions Regulator’s approach to funding defined benefit pension schemes for valuations with an effective date before 22 September 2024, in line with the Code of Practice on funding defined benefits dated 29 July 2014, alongside the relevant annual funding statements. It also summarises the Pensions Regulator’s approach prior to July 2014. For information on the Pensions Regulator’s approach for scheme valuations with an effective date on or after 22 September 2024, see Practice Notes: DB pensions funding reforms 2024 and The scheme-specific funding regime. When considering scheme funding issues, trustees and employers should take into account the Pensions Regulator’s approach to funding defined benefits (DB benefits). How would the Pension Regulator communicate its approach to DB scheme funding? The Pensions Regulator’s position in relation to DB scheme funding was mainly conveyed through the following documents: a code of practice on funding defined...

Entry conditions For informal restructuring to be an option (rather than using a formal tool such as a Part 26A restructuring plan), you need: a viable core business, even if it is currently burdened with too much debt early recognition of distress, for example a financial forecast indicating a likely covenant breach liquidity whilst restructuring is assessed—companies will usually fully draw any existing facilities as soon as they can support from key stakeholders—typically the secured lenders together with existing shareholders The cause of the present difficulties is relevant too. Informal restructuring may work where, for example: an asset or part of the business (eg a legacy factory unit) is loss-making and consuming resources rapid, acquisition-led growth means newly acquired businesses have not been properly integrated there is the loss of a major customer there is the loss of a major supplier pensions liabilities are high base costs have risen (eg many airlines...

While private sector defined benefit pension schemes (DB schemes) have been dwindling over time, more than 5,000 such schemes still persist within the private arena, collectively covering upwards of nine million members in total. Fears about deficits and attempts by employers to sidestep obligations have notably created an intricate mix of regulation and legislation, increasingly requiring lenders and their advisers to carefully factor DB schemes in from the very start of any deal and throughout both any restructuring and any insolvency process. The Pensions Act 2004 (PeA 2004) empowered the Pensions Regulator (TPR) to issue contribution notices or financial support directions to those connected to or associated with the scheme employer, ultimately rendering them responsible for providing backing or finance to underfunded DB schemes (the so‑called ‘Moral Hazard’ powers). In addition, PeA 2004 brought in a statutory duty to inform TPR of various events arising in relation to a DB scheme employer. That includes notifying TPR of any breach of a lending covenant. Underfunded DB schemes once again returned firmly...