New DB Funding Regime and Covenant Requirements

This document is a guide detailing the updated Covenant Guidance issued by The Pensions Regulator, which supports the new DB Funding Code. The guide outlines the significant changes in the funding regime that will impact DB pension scheme valuation discussions, marking the most substantial shift in nearly two decades. It specifies new covenant-related requirements that trustees must consider, particularly regarding employer cash flows and future prospects. The document emphasizes the need for trustees to report their conclusions about the covenant's ability to underwrite scheme risks and to provide detailed information on specific covenant metrics. It also discusses the legal definitions of covenant reliability and longevity, the importance of contingent assets, and the two assessment routes available for valuations: Fast Track and Bespoke. Additionally, it highlights key actions for trustees to prepare for these new requirements, including liaising with sponsors and assessing new covenant metrics.