It is important to understand your employer covenants and the level of security offered on your pension scheme.

The Pensions Regulator says that it is essential for the trustees of the pension schemes to 'form an objective assessment of the employer's financial position'. The trustee then has the task of reviewing the prospects of the scheme as well as the employer's willingness to continue funding such a scheme.

What is an employer covenant review?

An employer covenant review involves an independent and totally impartial assessment of the overall financial viability of an employer’s pension scheme.

Within the pension scheme you need to look at the investment strategy and funding levels as well as a covenant governing the scheme.

Questions need to be answered:

• Who is in control of the scheme?

• Who will find the scheme if there is a deficit?

• If the company is made insolvent, then would the buyout debt be paid in full?

• What is the recovery period?

• What legal obligations does the employer have to find the scheme?

• What will happen if the employer can no longer fund the scheme?

• What happens if a bad investment is made by the scheme?

• What is the security of the scheme?

A scheme is approached differently by employer covenant assessment trustees, depending upon the level of detail that they need to acquire to arrive at their advice.

It is important that the trustee consider:

1. The position of the employer, their financial strength, corporate group structuring, company policies, their management record and any future plans that they might have, that could affect the schemes.

2. The industry in which the employer covenant operates and their position.

3. How the company is positioned with the economy as a whole.

Every eventuality has to be planned for within an employer covenant review, including the possible insolvency of the company, especially as circumstances can change almost overnight for businesses. Understanding your employer covenant will help you to manage your pension scheme and look after the scheme members.