Covenant advisory services

The employer sponsoring a defined benefit pension scheme underwrites all the risk the scheme is exposed to. Therefore the employer covenant is a critical factor for pension scheme trustees to consider when deciding about the scheme’s funding and investment strategy. We have a dedicated team of experts who can assist sponsoring employers with preparing an objective review of the covenant for the trustees, assessing the impact of corporate activities on the covenant, and determining whether it is appropriate to offer any mitigation to the trustees. This team is part of the Punter Southall Transaction Services group which allows our covenant experts to benefit from and utilise our vast experience in the corporate transaction market. Our covenant advisory services for employers are designed to help companies achieve acceptable outcomes in covenant-related discussions with the trustees that satisfy the relevant regulatory requirements.

For further detail on the services we provide, including some of our recent case studies and information on our team providing this advice, please download our brochure.



We assist employers by:
  • leading pro-actively the covenant discussion and presenting on the covenant to trustees to pre-empt any issues and inappropriate anchoring of views
  • following a more re-active approach (if preferred) by discussing with the trustees their initial view on the covenant and addressing specific queries from them
  • ensuring that the strength of the employer covenant is properly reflected in the actuarial assumption and the level of prudence applied is not excessive
  • discussing with trustees how much the company can reasonably afford to contribute to the scheme
  • exploring the use of contingent assets and conditional funding arrangements as part of the recovery plan
Covenant reviews are triggered by either employer or scheme related activities; the actuarial valuation being the most common example. The events when covenant is a relevant consideration include the following:
  • Corporate events: merger and acquisition, divestment, refinancing and restructuring, dividend payment and share buy-back, deterioration of trading performance, change in credit rating
  • Scheme events: actuarial valuation, investment strategy review, apportionment arrangements, withdrawal arrangement, transfer value calculations, scheme merger or scheme closure


Our covenant advisory services help sponsoring employers:
  • understand the scheme trustees’ obligations and perspectives so they present the strength of the employer covenant correctly
  • understand the scheme trustees’ requirements so they release the right information in a timely and helpful way
  • encourage the scheme trustees to limit the importance given to short-term trends which can cause an overreaction to current events
  • answer questions posed by scheme trustees and provide explanations appropriate to the covenant assessment
  • highlight strengths within financial policy, capital structure and cash flows that may not be obvious to the scheme trustees or their advisors
  • show the strengths that come from capital investment in the business and the associated benefits to their future sponsor covenant
  • negotiate with scheme trustees or their advisors on covenant related issues, such as the pension scheme’s recovery plan
  • apply for Clearance from the Pensions Regulator and present the company’s case


The end goal is to agree with the scheme trustees a more accurate level of prudence in the valuation that secures affordable contributions without stifling future growth plans.

 Insights & views

    Pensions Bulletin September 2014
    4 September 2014
    69 AD is known to ancient historians as ‘The Year of Four Emperors’. It was a year in which four men in turn (Galba, Otho, Vitellius and Vespasian) tried their luck at the imperial throne following the death of Nero. For pensions professionals, 2014 will be remembered as the ‘Year of Four Bills’.

    Read more
    Pension Schemes Bill redefines pensions (again)
    14 July 2014

    The Chancellor’s Budget announcement of greater flexibility over retirement benefits has led to a major reinterpretation of what the word ‘pension’ means in a defined contribution context. Meanwhile, the Department for Work and Pensions
    (DWP) has been working on its own redefinition of pensions in a wider context, in the shape of the Pension Schemes Bill, which was laid before Parliament on 26 June 2014.


    View the briefing note

    Read more
    Pensions Bulletin June 2014
    3 June 2014

    In the latest issue of our Pensions Bulletin, we look at the changing pensions environment, focusing on transitional regulations on the definition of money purchase, the arrival of the Pensions Act 2014 onto the statute books and a consultation on regulations relating to the abolition of defined benefit contracting out.

    The Bulletin also looks at some other recent developments, including the first enforcement report for non-compliance with the employer duties legislation, the IBM case and a draft Statement of Recommended Practice on company accounts.


    Read more
    The Employer Covenant and the draft Code of Practice on Funding Defined Benefits
    3 February 2014

    ​The employer covenant has been placed firmly at the centre of the Pensions Regulator's new integrated risk management framework for trustees. This is set out in the new draft Code of Practice on Funding Defined Benefits, published on 2 December 2013.

    In this 'insight' we focus on the employer covenant aspects of the draft Code of Practice and explore their implications for both trustees and employers.

    To read more, click here.

    Read more
    Consultation on new code of practice for DB scheme funding
    17 December 2013
    On 2 December 2013, the Pensions Regulator (TPR) published for consultation a draft revised code of practice on defined benefit (DB) scheme funding, as well as a draft DB funding policy and a draft high-level DB regulatory strategy.

    Read more
    Apportionment arrangements and the employer covenant
    1 December 2013
    ​We have witnessed an increase in use of both scheme apportionment arrangements and flexible apportionment arrangements in the last 12 months or so as corporate entities reorganise themselves in order to cut costs or prepare to sell off non-core businesses.

    In this "insight" we review the key issues trustees and employers of defined benefit pension schemes should assess and understand when considering an apportionment arrangement. We focus on the funding test required for these arrangements and their wider covenant implications.

    To read more, click here.
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    Integrated risk management plans
    1 September 2013
    ​The Pensions Regulator (the "Regulator") is urging trustees to take an integrated approach to addressing covenant, investment and funding risks. When the Regulator first started to encourage trustees to take independent advice on the employer covenant, few did so but the majority do now.

    So will we start to see a rise in the number of schemes pulling together the three key threads that affect scheme funding in some form of integrated risk management plan? We believe this is a pretty sure bet.

    Click here to read why and how employers can start to prepare themselves for the challenges that await.

    Read more
    Employer covenant in the current economic environment
    1 July 2013
    Credit crunch, double-dip recession that wasn't, quantitative easing and a gloomy economic outlook. Recent years have seen a plethora of economic developments that have affected pension schemes and their sponsors. We provide our "insight" into these events and the impact they have had on the employer covenants supporting UK pension schemes. We also consider the additional factors that companies and trustees may now need to have regard to when entering the next round of pension scheme funding negotiations.

    To read more, click here.
    Read more
    Visit the Industry Insights page for news and views on the latest industry developments
    Speak to us

    Speak direct to our specialists in this area
    Lorant Porkolab
    Head of Covenant Advisory Services
    Or call us on
    020 3327 5000