Good morning and welcome to LC PS webinar on Covenant advice in the new funding regime. It is fantastic to see so many of you joining us here today across such a broad spectrum of pension scheme stakeholders. My name is Fran Bailey, I'm a partner in LC PS Covenant and Financial Analysis team and I'm delighted to be chairing today's session. Now today, we're going to discuss how we are advising trustees and employers on their first valuations under the new funding regime and helping them navigate some of the more complex challenges that this new framework has introduced. So to guide us through these topics, I'm joined by two of my expert colleagues, Helen Abbott, LCP Covenant partner, who previously led the covenant and financial analysis team at the Pensions Regulator, and John Wolf, Partner and Head of Covenant at LCP, who's been advising trustees and corporate clients on covenant matters since the mid 2000s. Now, before we dive in, let's cover a few quick housekeeping notes. This webinar is being recorded and we'll send you a link tomorrow so you can watch or share it with colleagues. And if you are watching on demand, a warm welcome to you as well. Now on your screen, you'll see the slides and the videos of the speakers. And if you lose a window, simply click on the relevant button at the top of your screen to restore it. Now you can access presented BIOS and additional resources via the tabs on your screen. So please do take a moment to explore these. And of course, we would love to hear from you during the session. So please use the Q&A box to submit your questions at any time. We'll address as many as we can live and follow up afterwards on anything that we don't manage to get to. So let's get started. Now. As many of you will know, December 2024 brought us a rather exciting Christmas present and that was the release of the Bench Regulator's updated covenant guidance. At last we had one of the final pieces of the new funding regime puzzle and as expected, it did align closely with the principles outlined to the DB Funding Code. Now together the code and the guidance represent the biggest shake up in DB pension scheme valuations in nearly two decades. And really at its heart they emphasize a future focused approach, but to prioritize where schemes are going over where they are now. So it's all about future covenant, future investment and future funding. And I think this forward-looking mindset really puts covenant considerations squarely at the heart of a schemes funding and investment strategy. And the regime reinforces the importance of something that we all know and that is integrated risk management, that's ensuring that funding and investment risks are aligned and fully supportable by the Covenant. Now, the new funding regime applies to valuations with effective dates from the 22nd of September 2024 and onwards. So based on the information that many of you shared when you registered, we know that there's a wide range of timelines for upcoming valuations. You've got almost 1/3 of you having a scheme with a valuation between the 22nd of September and the 31st of December 2024. But around 40% have a scheme that will start navigating this process during 2025. And then just over 1/4 a focus on valuation starting in 2026 and 2027. Now, whether your valuation is fast approaching or still quite a way away, I think now is the time to start aligning your approach with the principles of the new framework. So if you take proactive steps, you can address potential challenges early, you can ensure a smoother transition and really set your scheme and yourself up for long term success. So for those with valuations on the near horizon, today's webinar will provide some actionable insights that you can implement right away. And for others, it's an opportunity to prepare for what's ahead and fine tune your strategies under this new regime. So we are here. We're here to guide you through these changes and show you how covenant advice is evolving to meet the demands of this new framework. And hopefully by the end of this session, you'll have practical guidance to strengthen your covenant advice and your valuation strategies, no matter where you are on your journey. So here's what's coming up, Helen. We'll start by recapping the key covenant elements of the DB funding code and the updated covenant guidance. Then we'll pass over to John and he'll share some insights from the Trustee perspective, including his learnings from performing one of the first ever covenant assessments under this new regime. We'll then return to Helen and she'll focus on how we're helping employers prepare for valuations, including a closer look on how guarantees interact with the new guidance and the funding regime requirements. And then the last I'll be wrapping up. I'll summarize our key takeaways for trustees and sponsors as you prepare for your valuations. So with that, let's get started. It's over to you, Helen. Thanks, Fran. So Covenant is a really important part of the new DB funding regime. For the first time, the concept is actually defined in law. That's in the DWP funding and investment regulations that provide the legal framework for the new regime. And not only is the definition of covenant in there, but also the requirement that trustees assess it and report certain aspects of that assessment to the Pensions Regulator. For the framework for assessing covenant is now more prescriptive and there's some new covenant concepts that trustees need to incorporate into their approach, such as covenant reliability and longevity periods and calculating maximum affordable contributions. And whilst it's the trustees that have the obligation to assess covenant, all of this new approach is something that employers should also very much be interested in because in some circumstances it will change how the trustees view the strength of the covenant and could result in them requesting more cash or more contingent support. So it could be some situations where an employer thinks they've got an agreed long term strategy for their scheme, but the trustees have now reached the view that it doesn't fit with the new requirements. Even if this isn't the case, the new requirements are likely to mean that more information is requested for employers, particularly forward-looking information like forecast and business plans. So it's important for employers as well as trustees to be thinking about all this. So from a covenant perspective, a key requirement of the new regime is that trustees of all schemes are going to need to confirm that their covenant can support scheme risks. This needs to be confirmed in the statement of strategy and that is regardless of how well funded the pension scheme is. As well as making that confirmation, the statement of strategy requires various other covenant information to be submitted. With the valuation. The extent of information needed will vary. There's a light touch approach where schemes are particularly well funded and meet the regulator's low risk criteria, or they're classified as small. A bit more information is needed for fast track schemes, including things like the covenant reliability and longevity periods and that maximum affordable contributions figure. And there's potentially a lot more information required where a scheme is taking the bespoke route or is reliant on contingent assets. So I mentioned that all trustees will need to confirm in their statement of strategy that scheme risks are supportable, and on this slide is the actual wording of that confirmation. The statement of strategy is quite a prescriptive document and the regulator has now issued templates for these. So you'll see that trustees will need to state firstly that they've assessed the covenant in relation to the valuation and secondly whether they have determined that it's adequate or inadequate. Now this makes clear that even for well funded schemes, there should be at least some high level consideration of the covenant and where schemes aren't so well funded there will be more work needed of course. So the new covenant guidance sets out details of how the regulator now expects covenant to be assessed and the considerations that should feed into trustees deciding whether it's adequate to support scheme risks. I've highlighted here the three key pillars of covenant assessment, cash flows, prospects and contingent assets. These are also mentioned in the DWP funding and investment regs and in the code, and each are chapters in this new covenant guidance. Now, we could spend ages going through the detail of these elements of covenant assessment, but don't worry, we're not going to today because we want to focus more on what you do with that information. Now, we've covered how to look at cash flows and prospects in some detail in our webinar last September and then contingent assets in a separate webinar later in September. You can access the recordings of both of those in the resources section of this platform. If you haven't already seen those or you'd like a reminder or just reach out to us if you can't find them, and then we'll send you the link afterwards. So cash flows, prospects and contingent assets all feed into the key new covenant concepts that the regulator expects trustees to be looking at and in many cases reporting their views on. So as a recap and for context about what we're going to cover in the rest of the webinar, employer cash flows are the main way most schemes will be funded. And this is future cash flows, which also involves assessing prospects. This enables trustees to take a view on what level of deficit contributions are reasonably affordable and so how long a recovery plan will be, what investment risk can be supported, and the covenant reliability and longevity periods. The third pillar of covenant assessment is contingent assets. Now for some schemes there won't be any, so this part won't be relevant. But for other schemes, contingent assets such as guarantees or security will be an important part of their covenant and will support risk taking over and above what the employers future cash flows alone can. As a reminder, the key principles are the contingent assets should be legally enforceable and appropriately valued. So for many that will be a distressed valuation because they will be called on by the trustees either an employer insolvency or in other difficult circumstances. Now we've already seen guarantees being a key area of discussion in the new regime, and I'm going to cover an example of this later in my case study. Another important three chapters of the new covenant guidance is set out on this page. And these give really practical guidance about how to put together the various covenant inputs from looking at cash flows, prospects and contingent assets to determine what a suitable recovery plan is, the reliability and longevity periods, and assessing what level of risk is supportable. So there's lots of helpful examples in these sections, which is great because all these concepts require trustees to actually quantify amounts. And this is a key way that these new requirements differ from how many covenant assessments have been done in the past in which the main conclusion was the covenant grading. Now, you can still use the covenant grading, of course, and we found that we are in the reports we've done recently. But what the regulator is clear on is that the grading alone is not enough. Risk capacity must be clearly quantified and that's in terms of pounds based on cash flows and contingent assets and also time periods for longevity and reliability. Now, I think there's a bit more familiarity with the concepts in the recovery plan section. Reasonable affordability and sustainable growth considerations have been around for a few years, although of course worth noting that the requirement the funding deficit should be paid off as quickly as an employer can reasonably afford is now not just guidance from the regulator but also included in law. So moving on to the reliability and longevity periods, we see these as being key new areas of debate for schemes and with their potential six and 10 year time horizons, trustees have been asked to take a longer term view on covenant than previously, which will be a challenge for some and for many will mean more detailed review of forecast than ever before. The reliability. In particular can influence multiple aspects of the valuation approach like the length of recovery plan, the investment strategy and whether the trustees ask for contingent support. If there are any concerns about longevity. That could accelerate when the scheme targets reaching low dependency. So it's not scheme maturity that's the key driver anymore. Now we covered in our in our September webinar how we approach assessing covenant reliability longevity periods. So I wasn't going to say any more about the theory on that today, but we will be including these concepts in our case studies later. Next is assessing supportable risk. For this trustees will need to quantify in pounds how much risk can be supported by the covenant over the reliability. And there's this key new concept of maximum affordable contributions. Now this could mean a detailed review of the employers forecasts and potentially consider in a period of time after the period those forecasts cover. Now we found this to be a key part of the advice we're doing now. So I want to say a couple more things about the theory and then John's case study will cover how we've actually approached this for a 30th of September evaluation. Now the regulator has helpfully provided quite detailed guidance and examples of how it expects trustees to assess the portable risk. And there's two key covenant inputs to this. Firstly, the reliability. In years and then the total of the pound amount of cash or contingent support available for each of those years. That total cash is what's called the maximum affordable contributions and that is the amount that the employer could afford to contribute to the scheme if downside events occurred. Now that's in addition to any committed recovery plan contributions. So this calculation also impacts schemes are fully funded on the technical provisions. For many this will be a much more granular assessment that has been done before, and this was a key factor in the real life case study that John will run through now so he can give some more context on this point as we move from the theory to the practice. Thanks very much, Helen, and good morning, everyone. It's great to work at firm like LCP where we can get together with our colleagues and think on how big picture things like the funding code will impact on our clients across covenant, actuarial and investment disciplines and how we can help them through the challenges they're facing. But theory, as Helena said, is one thing and practice is where the learnings really begin. And that's why I was really happy to have a Trustee covenant client with the 30th of September 2024 valuation date, which was a huge eight days after the new code became effective. So this was a great chance to help the trustees to be one of the first boards in the country to go through the new valuation process. And we delivered our initial covenant advice just before Christmas. Just for some quick background on the client, the scheme sponsored by the UK company in an overseas group which manufacturers products within the agricultural supply chain of crucial importance evaluations under the new regime, the scheme did still have a notable funding deficit. There was no contingent security in place and it was estimated that the scheme would reach significant maturity by 2031. And this latter point had the impact of creating a notable line in the sand on the available time period for the scheme's journey to to low dependency. So without getting into the weeds of what we actually did in terms of the financial analysis, I thought it'd be most useful to run you all through my key learnings from the process, which is hopefully useful as you all come to plan for your first valuations under the new code. So starting at the end, the overarching objective was for us to make sure we were doing the appropriate analysis to give the trustees what they needed to conclude in line with TPR requirements in our report plan. We therefore started with the design of the executive summary very early on to include a simple overview of the key conclusions trustees needed us to arrive at. I thought this was really important. It was really important thing to do to set out where we wanted to end up and it helped us to focus on the on the purpose of the analysis work. And these conclusions should chime very closely with the issues that Helen has has covered early on, earlier on. So the key items we concluded on are shown on the slide. As there was a funding deficit, we concluded on reasonable affordability taking account of the new legal requirement for the sponsor to repay the deficit as quickly as reason be affordable. We also needed to provide specific conclusions on covenant reliability and covenant longevity periods as these have a clear role in the trustees journey planning considerations and they also needed to be included in the Trustee statement of strategy in most cases. Next, and probably the most complicated area of our work, we needed to provide a clear conclusion on the maximum level of affordable contributions over the covenant reliability. This is important as it establishes the capacity that the covenant has to absorb an investment stress over the reliability. As required by the Code and we did also include a covenant rating. Although a rating is not required under the new regime, we thought it important to maintain one to enable us to give a view on how the available covenant support had developed since the previous valuation. And this provided the trustees with the continuity to the previous covenant work that we that we've done. So my next learning is that quality, engaging with key stakeholders was an absolutely critical part of the project. Firstly, we needed to have effective planning sessions with both the scheme actually and the trustees investment advisor because we each needed to understand some initial conclusions from one another to get ourselves started on the work we all needed to undertake. For example, it was useful for us to understand whether it was possible for the scheme to comply with fast Track, which in this case it could. The range is what the scheme's deficit could be on a 2024 valuation basis and a ballpark investment stress that the covenant may need to under write. In turn, it was useful for the actuarial investment advisors to know our initial ballpark views on affordability and reliability periods so they could model out potential journey plans and appropriate stress tests to be considered. When we all got together with the trustees just before Christmas, we also had a really valuable initial positioning meeting with the company. So the trustees are very healthy, warmed them up to the fact that our work would need to be more in depth than previously given the new requirements. But it was great to build trust by explaining why our information request this was more detailed than usual and also why each piece of information was needed as ultimately we'd not be able to conclude in any kind of positive way if there was a lack of data and kicking off the project in this way. So it's a good time with the company, which was maintained throughout the process. So a key take away from me here is that the Trustee is doing some of that initial positioning before we reached out to management really helped with the company's buy into what we were trying to achieve. I did mention earlier that the most complicated part of our work on this project was establishing maximum affordable contributions to support investment risk. And Helen's already kind of touched on this as a key part of the new the new regime. So this webinar is not intended to be a teaching, but I did think it would be useful to just take a little bit of time to explain the concept and why this differs to traditional affordability assessments for recovery plans. So I personally got a lot from understanding the differences between these two concepts when we were preparing our covenant report. So I thought it would be great to share. So key points on reasonable affordability for a recovery plan set out in the middle column of the table. And this is all about repaying a technical profession provisions deficit as quickly as the sponsor can reasonably afford. Although this concept is now written to law so the stakes are raised, it's not a new concept and most trustees and advisers will be familiar with it. For these affordability assessments, trustees need to consider all available cash and liquid resources of a sponsor, for example. For example, cash on the balance sheet or undrawn credit facilities, as well as the cash that's expected to be generated from operations as their forecasts. If covenant risk is perceived to be low, reasonable alternative uses of cash such as dividends to shareholders can be OK, albeit TPR clearly states that this would not be appropriate if the covenant was judged to be weak. And this all compares to maximum affordable contributions, which is shown in the right hand column of the table, which is all about establishing how much cash flow could potentially be generated over the covenant reliability period to support the scheme if assuming an investment stress had occurred in line with the parameters set out in the code. And this different measure of cash flow ignores discretionary payments like dividends or great related CapEx. But it's stated after scheduled deficit reduction contributions, with the idea being that if the investment stress is higher than these maximum theoretical contributions, then there is too much risk in the investment strategy. Reasonable actions in this case could be to reduce investment risk or potentially to fill the gap somehow with some form of contingent asset. So whilst I initially thought this was all clear to me from reading the new funding code in the covenant guidance, it actually took out having done the work for me to really understand how an assessment of maximum affordable contributions might work in practice. And all this leads me to my final learning point. So our analysis involved an in depth assessment of the employers forecasts, understanding the assumptions that have been built into them, what the external factors where they could trade the company off track and an in depth review of investment plans to understand what was normal business as usual CapEx and what was CapEx for great projects. And at the end of this all, it actually leads to quite a mechanical output. But what I learned at this point was that the overall process potentially becomes highly iterative. I mentioned before that we had some ballpark figures from the scheme actually and the investment advisor, but it became clear that our covenant conclusions had the potential to impact the starting positions. For example, starting in the top left hand corner of the slide, our views on affordability and the recovery plan did have an impact on the level of deficit reduction contributions, which in turn had an impact on maximum affordable cash to support investment risk, which in turn influenced how much investment risk could be taken. And if we had concluded that there was not enough future cash flow support, future cash flow to support the proposed level of investment risk, it could well have led to a need for a for higher contributions. And so we would have gone back around the circle. And just for a little extra fun, as shown in the box at the bottom of the slide, our conclusions on the covenant reliability. Also had an impact on the magnitude of the investment stress which needed to be supported by maximum affordable contributions. And this is because from a technical standing, the funding code states that at a minimum the investment stress to reflect the scheme downside event should have a one in six probability as a minimum applying over the reliability. So you might say to me at this point, you know, John, these are all really interesting observations, but but what's your real learning point here? So this process is very helpfully helped me to form a few that there are three main ways of planning for evaluation under the new code. And this is as set out on this slide. So firstly, you could start with the government assessment and then have a blank canvas to create the funding and investment strategy around the level of risk capacity available. But in practice, I don't think this would be a very popular approach is it would mean potentially discarding a lot of the good work that's been done already in the past by trustees and employers. Secondly, the stronger covenants where there is minimal risk, a good approach following a quick sense check between advisors, maybe for the funding and investment strategy to come first and then for the covenant work to demonstrate that there is sufficient covenant support available to underwrite the risks. And this could fall into what TPR refers to as a as a proportionate approach. And finally to situations where covenant risk is is a more material issue and the reliance. Is longer and iterative process is somewhat inevitable and there is a high onus on collaborative working between Trustee advisors to guide the trustees sensibly through the valuation process. So that's all I was going to say. I hope you found the case study useful. I've obviously focused on the Trustee perspective given that this was a Trustee clients. But now to switch focus, Helen is going to talk about the employer perspective on guarantees under the new regime. And actually, John, just to interrupt before we hand over to Helen, we've had a couple of questions that I think would be actually really helpful for us to discuss at this point. First one ties directly to your comments about engaging with employers. And one of our audiences asked what do you do in situations where employees are unwilling to provide forward-looking information? Well, there's, there's kind of always been that issue with kind of certain employers as long as I've been doing covenant and it, you know, they are required to provide the information the trustees reasonably need to discharge their duties. But there, there sometimes has become a bit of a roadblock. And in a lot of cases the trustees have had to had to make make best of the situation. But now we've got this very clear link between what trustees specifically need to conclude upon and what they need to put in their statement strategy. There is much more leverage in those circumstances for trustees to say, well, look, if we haven't got the information, if we haven't got the evidence from the company, we cannot positively conclude in this area. So we're going to have to change our strategy and be more prudent. And that's, you know, hopefully going to have the the encouragement factor to make sure that if if companies maybe want to avoid trustees taking a dimmer view and taking more risk out the investment strategy, potentially increasing the the probability of contributions is very much in their interest to provide that data. No, I completely agree. I think there's definitely a strong sort of compelling case for the employer to do so. But I suppose related to this topic, and this is probably one for you, Helen, we've been asked how can trustees take a view on employer forecasts for longer periods than the employer itself will do? That's a good question and actually something that's going to be relevant for many trustees. So I think it's about looking at risks to the employer continuing to continuing to operate in substantially the same way as it does today and over that forecast period. So the sort of things we look at are the sector it operates in position of the employer in it, is it a market leader for example or is it already lagging behind? What is the strength of the covenant today and over the forecast period? So the stronger the covenant, the more able you'd think it would be to respond to any challenges as they arose. So again, you'd be a bit more comfortable there. How much debt it has, how much diversified diversified operations are. So it's really about thinking like what was going to change in that say three to six year. Where you don't have forecasts, but you still are thinking about whether the covenant is is reliable. No, I think that that definitely makes a very, yeah, sensible approach to how, how you manage those sort of discrepancies between the sort of length of time that you can look at in terms of forecasting. Just moving on now to your next topic, Helen. It's on guarantees and the sponsor viewpoint. So back to you. Yep. Thanks, Graham. Yeah, so guarantees and how they fit with the new covenant requirements have been coming up a lot in discussions recently. The drivers for this or the new concept of a look through guarantee that's been introduced by the regulator and trustees being encouraged to take a more critical look at what support their current guarantees provide in different scenarios. So I put a summary of the look through guarantee on this slide. A look through guarantee basically means that the guarantor mirrors all the obligations of an employer. It's unlimited, covers all monies owed by the employer to the scheme and for whatever reason and it can't be removed unless the trustees agree to it. So it's unconditional. And another key aspect is that it provides the look through to the guarantor cash flows for assessing affordability. And it's really on this aspect that the previous gold standard of APPF compliance, Section 75 guarantee for short, there are many other sorts of guarantees that fall short in other ways, for example, because they're capped in amounts or time period or they have certain conditions attached to them. So recently I've been helping a corporate client prepare for their December 2024 valuation under the new regime. Last year, the Trustee started mentioning that they didn't think they'd be able to give as much credit to their guarantee at this valuation as they have previously. So we've been helping the employer to understand how the current arrangement stack up to the new requirements, what their options are and the pros and cons of these. So in this slide, I've shown a comparison of the key covenant conclusions based on the support available from the employer and the guarantor. So you can see that with the employer, there's much shorter reliability longevity periods and there is for the guarantor and also a huge difference in maximum affordable contributions with a 6 million from the employer clearly not covering the scheme risk of 20 million and meaning that potentially the investment strategy would need to change. But the 500 million from the guarantor very comfortably covers the current strategy. And I've included the covenant maintenance here because I think it's a helpful and clear indication of the difference in strength with the employer being weak and the guarantor strong. Now this flows through to the technical provisions we'd expect the trustees to use because without better access to the guarantor they would have to adopt A more cautious approach which means there's a deficit and recovery plan needed based on the employer. But if we can take into account the much stronger covenant of the guarantor, then there's no technical provisions deficit and no recovery plan needed. So here we've shown the key terms of a look through guarantee compared to the schemes current guarantee which has an expiry date and is capped. And even though in this case the expiry date is quite a few years off and the cap actually now does cover the Section 75 deficit, the new covenant guidance requires the trustees to take that more critical look at these things and consider, for example, what happens in 2035. If there's still a deficit and the employer is weak, how can the trustees be comfortable that the scheme will be adequately supported? What if the guarantee isn't extended? With this guarantee, there's also restrictions on the trustees investment strategy, which doesn't fit the look through criteria. And crucially, there was no affordability link, so the scheme couldn't actually formally access those much greater cash flows from the guarantor. So the trustees had started hinting last year about a look through guarantee. So we help the employer and guarantor consider the pros and cons of this and also to understand what other options were available. In this case, the guarantor has decided that it is willing to change some of the terms of the guarantee for this valuation. It's proposed to the trustees that the guarantee could be uncapped in time period and pound amount and it's comfortable to propose this because it had always intended to provide a long term guarantee anyway and now the scheme deficit is much smaller than before. It's unlikely to get above that 100 million cap, so that's also fine. However, it is very keen that the scheme keeps an investment strategy that targets a certain level of return and so minimizes the likelihood of cash contributions being required in future. And so I wanted to keep that aspect of the guarantee. So there's now been some in principle discussions with the trustees about how to amend the guarantee and we think a compromise has been reached to include the affordability link. So this provides protection for the scheme. If the investment strategy doesn't go to plan and a bigger deficit emerges in future, they can then access those much larger cash flows at the guarantor to fund the recovery plan. So the new guarantee here doesn't meet all the criteria to be a look through guarantee, but the key thing is that the support is sufficient for what the scheme needs and it achieves the employer and guarantors objectives of keeping an investment strategy that ideally means that future cash contributions won't be required. Also sorting out this key element of the covenant really early is expected to make the rest of the valuation process a lot easier. So my key takeaways for employers are it's worth engaging early with the new requirements, and this means seeing how the current covenant stacks up and identifying potential gaps and what the trustees might be thinking about and asking for. This gives the opportunity to consider your options for providing support and what fits best with your own business objectives. Then we suggest proactively putting proposals to the trustees and also providing support and information on the covenant implications and benefits. So it's providing what the trustees need to properly assess the proposal. Ben, thank you very much, Helen. Now as we're nearing the end of today's plan content, I would just like to share some closing thoughts before we move into the Q&A session. So today we've explored how the new funding regime is reshaping covenant advice and shared Trustee and employee focused case studies to illustrate what does this look like in practice. So as you prepare for your valuations, I think there are three key takeaways to keep in mind. My first is understand the new requirements. The new funding regime introduces a fundamental shift in how covenant assessments are conducted. Trustees are now required to quantify covenant reliability, longevity, maximum affordable contributions and supportable risk. And this is a big departure from the past. Now these concepts directly impact scheme funding, investment approaches and the statement of strategy. And so for both trustees and sponsors, a clear understanding of these requirements is a key first step. Secondly, early engagement across key stakeholders. I think the complexity of this new regime means that collaboration isn't just helpful, it's critical. Trustees and sponsors and advisors must be working together to align Covenant funding and investment considerations. Because by starting their discussions early, you can anticipate challenges, streamline decision making, and avoid last minute surprises. And then lastly, let your scheme's position drive your approach. Strategy should be reflecting your scheme's unique circumstances, its risks, its objectives. So for stronger covenants, you've got a lighter touch approach, and that may be all you need really focusing on confirming risk capacity around the existing strategy. But for weaker covenants, a more detailed, perhaps iterative process is likely to be required. So if we keep these principles in mind, trustees and sponsors can navigate the covenant requirements of this new regime thoughtfully and effectively. You can minimise potential hurdles and ensure that you are fully prepared to tackle your first valuations with confidence. And so with that, let's move into the Q&A session. We've had loads of fantastic questions again, so thank you so much. Please feel free to keep submitting them and of course, we'll address as many as we can during the remainder of our time today. So first up, we've had a number of questions on the topic of what does a light touch approach look like in practice, for example, farewell funded schemes. I think, John, if you want to give us your thoughts on that, that would be brilliant. Yeah, no problem at all. Thanks Fran. I think one of the questions in particular was around what if the schemes actually in surplus. And I think what the, what the regime is really trying to get you to do is to work out whether the the risk you're taking and the exposure to members could be supportable by the covenant. Now, the starting point I would have, if I had a scheme in surplus and I was thinking about the government work needed, would be to see whether or not there is still a surplus after the investment stress that the TPR is prescribing. Because if there's not, then actually you're in a very low risk position, you're not really placing, you know, hardly any reliance on the covenant at all. And that statement that Helen showed earlier on from the, the statement, the strategy around assessing the covenant and whether or not it's adequate, I think you could quite easily answer yes, if you've still got a surplus even after that investment stress. So in those cases, I would focus my cover review on looking out on how long you're likely to be relying on the employer for because things can go wrong and then looking at the risks that could impact upon the employer over that period of covenant reliance. I think that's where I would kind of be focusing my work. But then if you after that investment stress you're, you are looking at kind of a potential deficit opening up. If that stress did occur, then I'd be starting by thinking, well, do we have different kind of a high level view? Do we have enough support to support that risk that's being taken on? And given that the given the schemes probably quite well funded, it could be just looking at a set of financial statements, you might find that there's many multiples of available cash over that potential slice of slice of risk. So that might mean that you do quite, quite a high level kind of review on the, on the cash flows. The issue where you might get into doing more work is if that investment stress actually opens up quite a big deficit. And you've got to show quite a bit details, evidence trail of how you get to the point where you're, you're comfortable that the the covenant can support that risk. But that's kind of my my thought process on that question. That's really helpful. Thank you. Thank you, John. And we've, we've also had a few questions around guarantees. I think the first one is thinking about the covenant guidance on guarantees requires a legal mechanism enabling the trustees to look through to the guarantors, guarantors cash flows. So this is really about having a the look through element and being able to consider affordability. And do you want to tell us your thoughts on that? Yeah, it's that about what, what what to add to the guarantee if you've already got sort of say yeah, yeah, all singing, all dancing, PPF one. Yeah, that's exactly. What's the difference between the current and the now new gold standard? Yeah. So, so it is literally about including a confirmation in a legally binding form that the guarantor agrees that the trustees can look at their cash flows for assessing affordability. Because without that, the way the law works as pensions, general law is that it has to be the employer. Even if the schedule of contributions is then guaranteed by by a guarantor, the actual assessment of affordability has to be on the statutory employer itself. So it's just including a statement that has legal backing. So so in the guarantee as such to confirm that the guarantor agrees that the trustees can look at its cash flows. Thank you for carrying that up. And we've got another question through. And John, this one is for you. Is a Covenant assessment now more expensive than it was in the new regime? I mean, that's a good question. I think inevitably if you've got a scheme which is taking it does have material covenant reliance, it's going to be relying on the the covenant for a long time and there's a a big slice of risk left to cover by the covenant. I think it's inevitable that your covenant assessment will be more expensive. But the value that that's providing is it is providing the trustees with the conclusions and the outcomes that they need to provide the evidence. The TPR saying they need to say why their their journey plan is supportable given the the risk on the pin provided by the covenant. And it will also lead to the information that they need to document that in the statement of strategy. So that's the that's the value that you, you as kind of trustees would be getting from, from that more expensive covenant review. But I think on the flip side of things, if you are in that kind of well funded position, I think you know, potentially you might be looking at given the way, you know, if you think back to your your situation three years ago, which might have been pre guilts crisis, maybe the scheme wasn't as well funded. There is scope for for fees to be kind of comparable to to the last time you had a government assessment if you can take that proportionate approach. So I think it's very much kind of horses courses. No, definitely agree that I think it really depends. It's quite situation specific. We've had a couple of questions regarding maximum affordable contributions. The approach you should be taking there. First one is just around what do you do if the scheme is in surplus and their contributions are suspended to give your thoughts on that, Helen. Yeah. So we're not talking about recovery plan contributions here. So it depends what kind of surplus the pension scheme is in. If it's in a buyout surplus and even after applying an investment stress test, it's still in a buyout surplus. And I think trustees can say, well, actually the level of covenant reliance is so low that that we're comfortable because we don't need need the covenant anymore under pretty much all foreseeable circumstances. But if you've say got either a small deficit on your buyout basis or you're after the stress test, you you're in a deficit position compared to the buyout basis, then it is something that you still need to consider. Because, you know, as been mentioned, things don't always go to plan. And trustees will want to make sure that they remain in as strong a position as they are today so that the employer is there to pick up things if they go wrong. So yeah, even for pretty well funded schemes, it's still important. But that assessment can be proportionate. So, you know, it's about firstly we'd suggest looking at quantifying the risk in in that scheme and then comparing it to the employers cash flows. And these might be just, you know, a bottom line cash flow figure, for example. And if that exceeds the scheme risk, you don't need to go through all the details. You know, if you can adopt A staged approach and if you're comfortable that the employer cash flows are sufficient at that early stage, you don't need to go through looking line by line discussing things with management that can be flexed because that's just sort of the icing on the cake, so to speak. No, thanks very much. Helen. We've had lots of lots of questions. There's one now coming through about how, oh extra question, how would you approach covenant advice for evaluation if you're preparing for an imminent buy in? Actually this one is one that I'm going to take in that sort of situation. I think you're looking at a scheme which is likely to have really limited investment and funding risk. So again, it's taking that as a proportionate might touch approach to assessment on the employer side. But I think here actually due diligence on the insurer becomes now quite a key factor. I think particularly the insurance regime offers quite significantly strong protections. Of course, that's why it's sort of considered the gold standard for pension schemes. But it is important to understand that it's actually not a zero failure regime. They in particular ensure business models and their risk exposure and their solvency approaches can actually really differ across the market. So we're seeing a lot of clients now coming to us asking about that sort of more in depth analysis on on their potential insurer counterparty and looking more sort of widely across the market to, to see a little bit more of the differences between those. There's actually quite a bit more information on that particular point in the resources section. So and please do have a look at that for for for a little bit more on that topic. So next question we've got, OK, this is a reasonable affordability. I think this one is a good one for you, John. And so while the status of reasonable affordability is different, the requirement is different. Do we actually expect any difference in interpretation? That's a good question. So I think obviously being written to law does raise the stakes. I in terms of general interpretation, I think not much has changed. The, the, the, the basic overarching concept is that you can use available cash for other reasonable uses. If your scheme is in a, in a lower risk position and you've got confidence in the covenant. Whereas if you're in a very weak covenant position, you would be expecting there to be protections in place to prevent covenant leakage. And effectively, you know, all of the scheme, all of the money that the employees generating to go into the scheme. I think what has really changed is the fact that trustees will need to make sure there is a very clear evidence trail from how they've gone from, I guess assessing their covenant to what they've written in the, in the, in the statement of strategy around, you know, what is reasonably affordable under their, under their recovery plan. And although, you know, whether you go bespoke or fast track shouldn't really impact on this, I think there's obviously a much higher chance that your workings will get scrutinized if if you go down a bespoke route. So I think it's it's really crucial that that evidence trail for how you've reached that conclusion is documented. Brilliant. Thank you very much, John. And I'm, I'm conscious that we're actually nearly out of time now, so I'm just going to take this opportunity to wrap up. Thank you so much everybody for engaging with us throughout the presentation this morning. And we've had loads of fantastic questions. We haven't been able to get to all of them during the live portion of the webinar today, but do not worry, we will be following up with a response to all questions in in due course in the next few days. A recording of this session will be sent to all of you very soon and you will still be able to ask questions later on if there's anything that comes to mind. There's a link within the recording, so please do get in touch if anything. Yeah, it does does spread to mine later on. Please feel free also to share this link with anyone else you think might be interested. 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