½Û×ÓÊÓƵ

What is the employer covenant?

Traditionally, in the context of a defined benefit (DB) occupational pension scheme, the concept of ‘employer covenant’ has been understood to refer:

1. •

   the legal obligations of the employer to support the scheme, and

2. •

   its financial ability to meet its legal obligations to support the scheme

It was not until the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations, SI 2024/462 (the Funding and Investment Strategy Regulations 2024) that the concept of ‘employer covenant’ was legislatively defined. This definition is comprised of two limbs, the first of which echoes the traditional definition mentioned above, while the second one goes further by incorporating the support derived from contingent assets. More specifically, the phrase ‘strength of the employer covenant’ has been defined as:

1. •

   the financial ability of the employer, in relation to its legal obligations to the scheme, to support the scheme (referred to in this Practice Note as Limb 1), and

2. •

   the expected level of support for the scheme