NAPF CONFERENCE 2008 - Trustees must take weakened sponsor covenant seriously

TPR head of scheme-specific funding Ian Cordwell told delegates scheme sponsors' assets were likely to have been depleted by the credit crisis, leading to weakened sponsor covenants.

He said this was an issue that needed to be addressed now as it was likely to lead to more constraints on the short-term availability of cash from the employer.

Cordwell said: "Trustees and employers must share these expectations with all involved and not wait until they have got down the track and the valuation has already been carried out. The scheme will have to move down the pecking order in terms of how much they will be able to get from the employer, but trustees have to make sure that the sponsor continues to act into the future.

"Do not take the sponsor out of business in the short-term because in the long-term that will throw the scheme into the Pension Protection Fund."

He explained key issues in the second round of actuarial assessments – which were introduced in the Pensions Act of 2004 – included longevity and, inevitably, the current economic climate.

However, he noted: "It is very easy to get hyped up about short term issues, but we need to keep them in context of liabilities that stretch out 40 years or more."

Cordwell added one in five schemes now had some form of contingent asset arrangement with their employer and said he fully expected to see that number rise during this round of actuarial assessments.

"This is an area where schemes can potentially bridge the gap where short term cash may be hard to come by", he said.

Cordwell also warned the regulator's powers on scheme funding were limited.

"There are real risks of employers and trustees throwing the problem to the regulator and problems are much better solved by two parties working together," he said.