The Pensions Regulator (TPR) has published the first in a series of guides for trustees of DB occupational pension schemes to help them apply the DB funding code of practice.

It provides good practice guidance on how to assess and monitor an employer's covenant, legal obligation and financial ability to support their scheme.

One of the main principles of the code of practice is an integrated approach to risk management and understanding the strength of the employer covenant underpins effective risk management.

TPR chief executive Lesley Titcomb said: 'The code highlights how trustees need a strong understanding of a scheme's covenant in order to take an integrated approach to risk management and use the full flexibility of the funding regime.'

'I urge trustees to use this important guide to assess and monitor their employer covenant in a way that is proportionate to the circumstances of the scheme and the need for an employer to grow.'

The guidance is broken down into a series of user-friendly examples, checklists and scenarios, following feedback to the regulator that a practical approach was required.

Later this year, the regulator intends to produce further guidance to help trustees navigate the DB code, including guides on integrated risk management and investment strategy.

The National Association of Pension Funds (NAPF) welcomed the new covenant guidance, saying covenant assessment is the bedrock of developing sustainable funding strategies for DB schemes.

Helen Forrest, NAPF policy lead for defined benefit said: 'We welcome the pragmatic nature of the document and the thoughtful and extensive approach TPR has taken to engaging with industry in its development.'

'In particular, the new guidance will make the whole process of covenant review significantly less arduous for trustees, and will hopefully also help them to save money on advice.'

Simon Kew from pensions advisory at Deloitte said the guidance reinforces the principle that assessing covenant is not a one-off process.

He said: 'Monitoring should be in force, along with appropriate triggers, to ensure that trustees can react nimbly and appropriately to changes in covenant.

'The guidance also puts objectivity centre stage, very clearly flagging that the regulator would expect the trustees to bring in external advice where there is a 'failure to agree' with an employer or a conflict of interest on the trustee board,' he added.

First published 20.08.2015

Lindsay.sharman@wilmingtonplc.com