Ask the Analyst Q2 2021
How does a guarantee impact the covenant?
Overall covenant strength can be a combination of both the direct covenant provided to the pension scheme from its employer(s) and, where legally codified, (for example through a guarantee) the support from its broader group. In addition to the strength of the guarantor, the benefit of a group guarantee depends on its terms, in particular:
- Any limitation on the guarantee (for example a defined time
period or a cap on the value that the scheme can claim);
- The obligations guaranteed, whether this be recovery plan
payments or downside protection through s75 debts; and
- Whether it permits affordability to be assessed at a group level.
In summary, where a scheme benefits from a guarantee, trustees
should ensure that the key terms are fully understood alongside
the strength of the guarantor.
Alex Austin, Analyst
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