Let me start by saying I am not an employer covenant specialist; I predominately help pension schemes with their investment decisions. However, having both produced and reviewed some of the early TCFD reports, as well as being involved in producing PwC's year one market review on the subject, one aspect that stands out for me is the limited consideration of the employer's exposure to climate-related risks. While some schemes have touched upon the employer covenant, the focus has often been on highlighting risks without providing a clear understanding of the potential implications or opportunities. These assessments have predominantly been qualitative in nature, lacking more comprehensive analysis.
When we contemplate the potential impacts of climate-related risks on pension schemes, two primary concerns arise: affordability (or lack of) and sponsor prospects. Naturally, a significant risk would be if the employer's financial position deteriorates to the point where funding gaps cannot be met to support the scheme's journey plans. Moreover, the simultaneous occurrence of impaired employer balance sheets and investment losses on scheme assets poses an even greater threat—an entirely plausible scenario given the nature of climate risk.
To truly address these risks, I believe a more integrated approach, reminiscent of Integrated Risk Management, holds immense value for trustees preparing their TCFD reports. Such an approach would consider the interplay between funding, investment strategy, and covenant strength, providing a holistic understanding of the scheme's risk exposure. Armed with these insights, trustees can make informed decisions to shape the scheme's strategy accordingly.
In light of these considerations, there are several sensible actions that trustees could consider:
As we continue down the path of climate-related financial disclosures, it is crucial for pension schemes to embrace a more comprehensive and forward-thinking approach. By integrating covenant assessment with the broader framework of risk management, trustees can unlock greater value for their schemes and ensure they are well-prepared to navigate the challenges posed by climate change.
A Defined Benefit pension scheme is looking to buy out in the next five years… its sponsor has operations that could become obsolete as the UK transitions towards net zero, maybe as early as 2050. But what does that mean for the scheme?
Founded in 2005, the Pensions Employer Covenant and Restructuring team is PwC's award-winning covenant team. We are the largest specialised covenant team in the UK with 90 people across 8 offices, many with a background in restructuring and insolvency, enabling us to respond rapidly to our clients’ changing demands.
