Just 12 per cent of UK pension schemes view covenant risk as material to their scheme’s ability to pay pensions, according to research by Janus Henderson.

The research was presented during a panel session at the PLSA Investment Conference 2022 yesterday, 26 May, by Janus Henderson Investors head of UK institutional, Anil Shenoy.

“I’m not sure if this was a sample size issue but certainly the schemes that were tending to weak that were surveyed seemed to put covenant risk lower down on their list of priorities. Those with a strong covenant and those which were in for buyout were very prudent on their covenant,” Shenoy noted.

In terms of monitoring, Shenoy said there are three ways of monitoring the covenant: a qualitative way, a deterministic way and a stochastic way, with larger schemes tending to opt for the latter approach.

On this, Citi UK Pension Plans chair, Colin Stewart, who also spoke on the panel said that relationship is key when it comes to covenant monitoring.

“I think it is building that relationship with the employer. In our organisation we have a little expression with the employer that we want ‘no surprises’ and that is no surprises on both sides. The only way you won’t get any surprises is if you are really engaging with that employer over the good times and the more challenging times.

“There are always solutions to things but you need to work them out. If you’ve got an employer covenant that is very weak and you’re having difficult conversations, if you don’t have that relationship then that makes that conversation much more difficult.”

Survey findings on relationships between schemes and employers found that the relationship is influenced by the strength of the covenant and the funding position. “A strong covenant and a strong funding position leads to a very good relationship with the sponsor,” Shenoy said.

Another panel speaker, PTL professional pension trustee, Anne Sander, believes that regulation could have a role to play in the area of employer covenant.

“Ironically, this is somewhere where regulation might help the weaker covenanted schemes or employer because having to set a long-term objective changes the conversation with the sponsor. You start to say, ‘yes, we have got an immediate funding problem, but let’s make sure we agree on what that long-term objective is and work out how together to get there’."

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