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Covenant Quarterly Q4 2021

Looking beyond the rating – an early New Year’s resolution

What is the purpose of a covenant assessment? Whilst the first task is to provide a robust rating for the covenant, it’s the “so what” that really matters.

As schemes become more mature and look towards their long-term objective, the covenant rating becomes less of a needle-mover on technical provisions assumptions, and trustees need to look beyond a point-in time rating to see the real benefits.

For instance, covenant should be at the heart of a scheme’s journey plan and trustees should be asking themselves:

– “Does the journey plan make sense given my sponsor’s ability to fund contributions;” and

– “How does the longevity of my covenant support investment risk over time? If not, what should we do differently?”

Furthermore, while there are many factors influencing member outcomes, covenant is the ultimate underpin. If the covenant fails, members miss out. If it endures, members will likely receive their benefits in full.

With that in mind, covenant should be a key part of trustees’ risk management frameworks with best practice governance meaning that:

– Plausible downside scenarios should be assessed for their impact and likelihood; – Potential mitigating actions to take now, and/or in response, should be identified; and

– A covenant monitoring framework must be calibrated for these downside scenarios to provide time for a response.

Monitoring is not just a numbers game. With so much social and economic change on the horizon, looking through the financials to the underlying opportunities and risks facing the sponsor is now more important than ever.

Why not set a New Year’s resolution to make the most out of your covenant assessment, stay on top of the key risks and refresh your covenant monitoring framework for the challenges that 2022 will bring.

In the meantime, the team at Cardano wish you and your loved ones an enjoyable festive break.

Read the full Covenant Quarterly Q4 2021 which also includes the following articles

  • Datawatch: Issuance of green bonds
  • Ask the Analyst, Sam Norrington: What does rising inflation mean for pension schemes?
  • Regulatory developments: Plans for the UK to be the first net zero financial centre

For more information contact Emily Goodridge, Director


Emily Goodridge

Covenant Assessment