The Pensions Regulator has produced 65 pages of guidance for pension scheme trustees and sponsors on assessing and monitoring the employer covenant. We have provided some generic guidance via the attached link – TPR’s guidance on assessing and monitoring the employer covenant.
Helpfully in Appendix B and C from pages 54 onwards there is specific guidance for not for profit organisations. The key recommendation is that commercial operations and donations need to be considered independently with the guidance providing examples where donation income represents a low and high proportion of overall income.
Clearly donated income can be volatile and can be highly sensitive to reputational risk, although it is also recognised that for many charities it is also linked to discretionary spend which can also be adjusted depending upon circumstances. Income from local authority work needs to be considered as a commercial activity and assessed very much in line with the general covenant advice.
The guidance also highlights the need to fully understand the legal obligations the charity has to the scheme and any restrictions imposed by its operational structure. In addition a clear view needs to be achieved on the financial support that the charity can make available linked to assessing affordability and the organisations growth plans and associated risk. It is also
critical to assess the insolvency position so that the scheme trustees have a clear understanding of the level of protection offered to the benefits promised.
The guidance also includes a specific section on Non-associated multi-employer (NAME) schemes, which very significant numbers of charities participate in.
Additional specific guidance is outlined around:-
- Understanding the number of active / eligible scheme members.
- Understanding the withdrawal mechanics and the likelihood of employer withdrawals.
- Understanding the proportionate share of the liabilities held by each employer.
- The additional confidentiality requirements of assessing employers where there may be competitive or conflict of interest issues to manage.
The guidance is very thorough and helpful although I suspect that the practical application may be much more difficult than the theory.