The way things were

Not so long ago, any pensions award ceremony had a category to “recognise” the employer covenant adviser whose job it was to tell the trustees the likelihood of an employer going bust.

The Pensions Regulator went through a phase when  it was obsessed by integrated risk management where the employer covenant was deemed as important as the investment and funding level of the scheme. If the Covenant reduced, funding would have to be higher and investment risk lower. It was so easy to explain in a diagram

But times have changed. Many of the schemes TPR looks after don’t carry the risk of going bust anymore, despite investments collapsing in 2022, the extraordinary increase in inflation and interest rates means that most schemes can claim to be self-sufficient of their employers and the employer’s role is now about overseeing the removal of the pension liability from its balance scheme by the most dramatic of “de-risking” – buy out.

A world where the insurers, superfunds and the PPF own DB pensions is a world with employer covenant advisers. This may explain why they aren’t so prominent at award ceremonies, they must fear for their future.

What future integrated risk management?

“IRM” is still embedded in the DB funding code and the importance of the employer covenant is such that without a strong one, you are on the fast-track. The fast-track is perversely a lockdown of investments and a reliance on the weak employer to make good any deficit from the opportunity-cost of not investing for growth.

Perversely, the weaker the employer, the more the pension scheme has to cost to keep funding where TPR wants it to be.

This of course means that most of the schemes that continue to pay their own pensions and haven’t “de-risked” are still governed by trustees who require the Covenant of the employer to be scrutinised with the help of employer covenant advisers.

All of this has to stop, sooner rather than later, if we are to get away from the unvirtuous triangle of mutual suspicion that IRM and the DB funding code encourages.

What future “clearance”?

When Nausicaa Delfas talks of a new way of using pensions to improve the productivity of UK PLC , she may be asking herself why employers who want to get on with investing for future growth, need to seek clearance from TPR to do so. The below is from TPR’s guidance on clearance which – if not obtained leads to a cash-call from the Regulator to the employer as a “contribution notice”.

Contribution notices require a cash payment to be made into a scheme, whereas financial support directions require financial support (in a form approved by TPR) to be put in place for a scheme. They were introduced .. in order to protect the benefits of scheme members and to ensure that pension liabilities are not avoided or unsupported

Whether by cash payments or by other means, employers still live under the threat that their pension scheme could block precisely the investment the Government is calling on them to make.

Does the PPF still need protecting?

Despite some isolated attempts by private equity firms to dump pension liabilities via pre-packs and the like, the PPF has taken on remarkably few schemes since inception. It is the fund it is – due to the success of its investment rather than a flood of schemes that have lost their “covenant”.

The expected collapse of small DB plans didn’t happen  and this is explained as one of the great successes of LDI,

“LDI worked until it didn’t have to”.

This is to reckon without the support for DB schemes demanded by TPR via IRM from small and medium sized employers. WTW estimated this week that £9bn would be paid into a flush DB sector by employers this year.

The tap that has been turned on can’t seem to be turned off, so instead of pension schemes investing into British business, British business is still piling money into its pension schemes to follow the dictates of the Regulator and its powers.

There is no need for such money to be paid , the PPF does not need protecting, members benefits are not at risk, the paraphernalia of the IRM with its covenant assessments and contribution notices should be packed away to the Pensions Archive, and the Covenant Advisers could be put to good work , doing the packing.

Covenant Advisers are endangered and will I expect become extinct. But I am sure these bright people can be repurposed to be more productive in a braver pension world!

Here’s a slogan for the future, where covenant advisers assess the likelihood of a good idea to succeed, rather than to fail!

The way things could be