The employer covenant
If your scheme is a defined benefit scheme, you have the promise of a certain amount of pension at retirement. This promise is known as the “employer’s covenant”
In a defined benefit scheme , you are able to work out how much pension you are entitled to when you finish work because in these types of schemes, your employer has made a promise to ensure you get this amount. In defined benefit schemes your employer promises to pay the money needed to make sure that the trustees are able to pay the benefits due from the scheme now and in the future. This is called the employer's covenant.
In defined benefit schemes the risk of any investment performance over the lifetime of your pension saving, is borne by your employer. This can mean that sometimes the employers have to make up any shortfall. The role of the trustees in defined benefit schemes is to monitor how well your savings are doing and judge the strength of the employer's covenant. Trustees need to consider the ability of the organisation to continue to make good their promise to pay pensions for current and potential members.
Trustees will take into account the employer's legal duty to support the scheme, the employer's financial ability to fund the scheme and their willingness to do so.
The covenant can be thought to be weak or strong, depending on what the trustees find out. If the trustees judge the covenant to be weak, they may ask the employer for more contributions. This would particularly be likely if there is already a big difference between the money needed to pay the benefits and the value of the scheme's investments.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.