Guidance on how to identify and assess each employer’s legal obligations to the scheme and the nature and extent of those legal obligations.
Published: December 2024
Identifying employers
Read paragraphs 14 to 17 of the Employer covenant section of the defined benefit (DB) funding code.
Identifying and assessing each employer’s legal obligations is a complex process and may require legal advice.
A statutory employer is an employer that is legally responsible for:
- meeting the funding objective of the pension scheme
- paying the section 75 debt when an employment cessation event occurs:
- on an employer leaving a multi-employer scheme
- on the scheme winding-up, or
- on the employer becoming insolvent
If an employer is not a statutory employer, you should understand its legal obligations to support the scheme. Based on this assessment, you should then determine whether it is appropriate to take account of the employer when assessing the scheme’s overall covenant and affordability.
Entities that are not employers to the scheme should not be directly considered when assessing the covenant. This includes entities that have a legal obligation to the employer (eg through a cost-sharing agreement), but not a direct legal obligation to the scheme.
Where an employer’s financial performance is heavily dependent on a third party, the wider group or a group obligation, this should be considered, alongside other factors, when assessing the employer’s cash flows and prospects. It should not be considered as a separate source of financial support for the scheme.
Contingent asset support should be considered in line with the guidance.
Read Contingent assets for more detail.
Trustees’ powers
You must understand the balance of powers set out in the scheme’s trust deed and rules, including your powers to:
- set the level of ongoing contributions and deficit repair contributions (DRCs) under the scheme’s contribution power
- make amendments to the scheme’s trust deed and rules
- wind up the scheme and trigger a section 75 debt
This will help you understand your ability to take unilateral action if you are unable to reach a consensual outcome with the employer and will inform your discussions with them.
Multi-employer schemes
The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 do not make any special provision for multi-employer schemes. However, in the DB funding code, we recognise that it may be unnecessary for such schemes to carry out a full assessment for each employer in order to comply with the legislation.
Where it is not proportionate to assess each employer, an appropriate alternative approach may be taken to reach an overall view on the covenant. An alternative approach may include pooling employers into sub-groups with varying levels of review for each, considering the aggregate performance and position of all the employers, or focusing on the employer(s) with the largest share of scheme’s liabilities.
The factors to consider when determining which employers to assess in detail, and the weight to be given to each employer, are set out in paragraph 51 of the Employer covenant section of our DB funding code. This includes understanding the position of the scheme in the event of insolvency or the withdrawal of an employer, eg whether the scheme has ‘last man standing’ arrangements or segregation provisions. These are discussed in more detail below.
The main sections in this guidance can be used to assist trustees of multi-employer schemes to assess covenant where all employers are under common control, and their obligations to support the scheme are treated collectively.
For NAME schemes, additional considerations are set out in the relevant sections of this guidance, where appropriate.
Last man standing multi-employer schemes
A scheme with 'last man standing' arrangements means that responsibility for outstanding liabilities falls on the remaining employers if a departing employer cannot meet its liabilities in full. These schemes can work in different ways, and the order of insolvency of employers can have an impact. You may need to commission legal advice to fully understand how the scheme operates. This may be the case, for example, where the insolvency of one employer does not result in a scheme wind-up, and the scheme is unable to claim as much value as it could in a group-wide insolvency.
Where a scheme is last man standing and covenant is considered on an aggregate or consolidated basis, you should be mindful of placing material reliance on an employer with a small share of the liabilities. These employers may be more likely to choose to pay their share of the liabilities and exit the scheme. In such circumstances you may consider taking legal and actuarial advice and reviewing the provisions of the trust deed and rules.
When reviewing aggregated or consolidated financial information, you should be sure that the information only includes entities that are obliged to support the scheme. Otherwise, the covenant assessment could be incorrect due to assumed reliance on entities that have no legal obligation to support the scheme. Where the employer is the topco in a group, it may be appropriate to consider the covenant support provided based upon consolidated cash flow information, on an ongoing basis. However, you should be aware of the risks this approach would have when considering any support in an insolvency scenario, ie due to structural subordination.
Although you can start with an aggregated or consolidated review in a last man standing scheme, you may wish to also perform a more in-depth, individual review for some of the employers. You should take a proportionate approach when determining which employers to focus on in the individual covenant reviews. In particular, you should focus on the employers with the greatest liabilities (who may or may not be among the stronger employers) and stronger employers, who are the most likely to end up with responsibility for the scheme’s liabilities, if the weaker employers cannot meet their liabilities in full.
The approach you take should be proportionate to the level of reliance placed on the covenant to support the scheme’s funding needs and investment risk. Where greater reliance is placed on the covenant, we would expect you to review a higher proportion of employers.
Formally segregated multi-employer schemes
Where the scheme is formally segregated, you should treat each segregated section of the scheme separately, based only on the employers that have legal obligations for that section. The investment and funding strategy should be set separately for each section, based on the assessment of available covenant support.
Partial wind-up provisions for multi-employer schemes
Some schemes have partial wind-up provisions, which means that when an employer ceases to participate, the assets and liabilities relating to that employer are segregated, or sometimes may be segregated at the trustees’ discretion. Where this is the case, you should understand each employer’s share of the scheme’s liabilities. This will likely require obtaining legal and actuarial advice. Such provisions can mean that the scheme may have relatively little recourse to the strongest employers. Therefore, reviewing all employers on an aggregated or consolidated basis risks overstating the covenant.
You should assess the covenant separately for each material employer if you believe there is a risk that the employers may not continue to support all the scheme’s liabilities on a collective basis. As part of your contingency planning, you should understand the scenarios where you would segregate an employer’s liabilities on failing to meet its liabilities in full where you have the discretion to segregate. You may wish to ensure employers are aware of such policies.
We may revise the covenant guidance when needed and include industry feedback. Send comments or queries about the new guidance to covenantguidance@tpr.gov.uk.