Assessing and Monitoring a Charity’s Covenant

David Davison

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As charities in LGPS in England await the results of the 2016 actuarial valuations they could be doing so with some trepidation given the changes in market conditions since the last valuation round in 2013. Increasing numbers of Funds are looking closely at the strength of the financial position of their admitted bodies – “the employer covenant” – in arriving at the level of contributions they’ll want them to pay. In simple terms the weaker the strength of the employer the more likely it is the Fund will look for higher contributions.

Assessing the employer covenant for charities is particularly complex given the potential variability of income most have to deal with.

Helpfully the Pensions Regulator has produced 65 pages of guidance for pension scheme trustees and sponsors on assessing and monitoring the employer covenant (with our commentary here) but particularly helpful for not for profit organisations is the specific guidance provided in Appendix B and C from pages 54 onwards. 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 LGPS 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 such as LGPS.

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. It’s important organisations are familiar with this and the approach taken by their LGPS in assessing employer covenant so they understand how the contribution figures have been derived and are aware if any negotiation around these is possible.

Read previous issues of our Inside Track Newsletter.

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers

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