Back in November 2024, TPR published its “Defined benefit funding code of practice” (the “Funding Code”). The Funding Code introduced the concept of a “look through guarantee”. As the name suggests, this allows trustees to look through to the guarantor’s financial ability to support the pension scheme as if it were a statutory employer when assessing employer covenant.

The Funding Code was followed shortly after by the publication of TPR’s covenant guidance on 4 December 2024 (the “Guidance”) which documents the requirements for a look through guarantee (and gives rise to a few unanswered questions).

What are the key takeaways?

1. A PPF standard section 75 guarantee does not tick all the boxes – for years, the PPF section 75 guarantee was considered to be the gold-standard guarantee in the pensions industry. However, this alone will not meet TPR’s requirements for a look through guarantee.
2. It’s not just a guarantee – the Guidance requires an information sharing protocol and a legal mechanism enabling a look through to the guarantor’s cashflows when setting contributions (referred to as a “look through to affordability”). These can be included in a “framework of agreements” rather than within the guarantee itself.
3. Legal advice is required – the Guidance expressly states that any agreement in which the look through guarantee requirements are included is legally enforceable, both in the UK and any relevant overseas jurisdictions. This should be supported by appropriate legal advice.
4. Uncertainty remains – as the Guidance is relatively new, there is not yet a bank of experience around what TPR will or will not accept as satisfying the requirements of a look through guarantee. For example, a look through guarantee must have “no onerous conditions attached that could compromise [trustees] or [TPR’s] powers”.  Whilst some conditions may very obviously be what TPR would consider to be onerous, there are likely to be some where it is not clear.

What does this mean for trustees?

Trustees must assess the value of guarantees at each valuation (or more often if appropriate). With the benefit of a look through guarantee, trustees can factor in the covenant strength of the guarantor when assessing the level of supportable risk for the purposes of the scheme’s journey plan and recovery plan.

Although a look through guarantee appears to be the new gold standard for pensions guarantees, value can still be placed on guarantees that do not satisfy all of TPR’s requirements. TPR recognises that the Guidance focuses on how to assess if a guarantee is sufficient to take additional funding and investment risk but this should not detract from the various other benefits that a guarantee may bring (such as giving trustees a seat at the table during negotiations along with other creditors of the employer or guarantor).

Trustees will need to work closely with their professional advisers to navigate the new contingent asset landscape.