Trustees should consider how a covenant is impacted by geopolitical volatility and factor that into assessment of covenant reliability, according to consultancy Lane Clark & Peacock.
The statement comes at a time of ongoing geopolitical instability, with the US-Israeli war with Iran currently in a shaky period of two week ceasefire and the Strait of Hormuz being tentatively reopened.
Under the latest DB funding regime, trustees are asked to determine a ‘covenant reliability period’ – which requires long terms assessments on how long there is ‘reasonable certainty’ regarding how much cash the employer is expected to generate and what could be available for the scheme.
The Pensions Regulator’s 2025 annual funding statement emphasises that trustees should consider trade and geopolitical uncertainty, as well as other longer-term economic dynamics like the energy transition, when assessing covenant.
According to LCP, some schemes will be directly impacted by the current Middle East conflict – for example, those with energy-intensive operations or supply chains that run through impacted geographies. For others, there will be less direct, but still potentially material impacts.
Helen Abbott, a partner in LCP’s covenant team, says: “Recent global events have shown how quickly circumstances can deteriorate, with significant and persistent impacts on employer strength.
“Trustees who monitor covenant continuously and maintain open, proactive communication with their sponsor will be far better placed to navigate difficult periods and take decisive action when needed.”
LCP also noted that for many businesses, the issues aren’t just from events this year, and that previous headwinds such as the Russian invasion of Ukraine conflict impacted supply chains and energy costs, and that the imposition of US tariffs has led to a resulting impact on global trade.
