Eyes wide open

Just a few years ago, covenant monitoring had hardly been invented. Like most good inventions, it is difficult to think what we did without it, and surprising it was not thought of before. How many of us could survive today without the comfort and security our mobile phone offers us, whereas just 15 years ago, only a handful of people owned one.

The new invention is still in its formative stages. Like early automobiles, the technology and production methods are developing rapidly. But like early automobiles it is still a relatively undeveloped and therefore a relatively expensive product, and some models are more roadworthy than others.

This is not to criticise the pioneers of this new activity. In the development of any new technology or thought process, we must go through this early phase in order to build a better and more comprehensive proposition in the future. After all, it would be equally foolish to point an accusatory finger at Karl Benz for failing to produce a sleek, air-conditioned four-door saloon with power-steering as it would be to insist that an 1879 internal combustion-powered Benz is fit for use on the M1.

However, we must first of all ask ourselves what sort of product or service do we want to develop? And, in order to answer this question, we need to pose another. What do we want the information for and how will we use it? Unless and until we have a better idea about this we will not be able to fine tune the process and offer the industry the exact solution we need. I think trustees and their advisers should devote as much of their valuable time as they can to answering this question before they go on to decide how best to set about their monitoring work.

I fear the honest answer in many cases is that there is actually rather little we can do with the information – at least immediately. To change metaphors: the health of someone we depend on is of critical importance and interest to us, but simply monitoring their blood pressure and heartbeat and other measures of health is not very useful if there is nothing which we can do about a gradual decline in the health chart or a sudden bleep of an alarm.

We know we should consider the strength of an employer’s covenant in deciding on a scheme’s technical provisions and its recovery period. But unless there will be sufficient funding to enable benefits to be paid in full on the failure of the sponsor, what, really, is all of our monitoring worth?

Perhaps, though, this realisation is the point. If monitoring the employer’s covenant forces us to confront this particular question of life and death then it will have been worthwhile.

If we are encouraged to plot a path to security for pension benefits so sufficient funding or contingent assets will be there if needed, then our monitoring will have been a life-saver. Now what exactly we mean by talking about sufficient funding to enable benefits to be paid in full is a hot topic for another column, and is at the moment the subject of fierce competition and debate in the market.

And, in case any reader should think I am being less than practical and constructive, the Society of Pension Consultants has just published (on its website at www.spc.uk.com) its “starter for 10” with suggestions for a practical approach to routine monitoring of the patient’s – sorry employer’s – health. Long may they live!