Other than the Beatles and Rolling Stones, it isn't often you can genuinely say you heard it first in the U.K. We have America to thank for many of our cultural influences and, as it happens, for a good number of the ideas that shaped the rebirth of the U.K. pensions regulatory regime in 2004-05.
Indeed, the U.S. was well ahead of the U.K. when, in 1974, the Employee Retirement Income Security Act was signed into law, leading to the creation of the Pension Benefit Guaranty Corp. as a safety net should a plan sponsor collapse. ERISA was the legislative response to the collapse in 1963 of the automaker Studebaker with the loss of around 4,000 jobs, and provides compensation in return for an insurance premium paid by all plans.
Learning from the U.S., following the well-publicized and scandalized case of the collapse of the Robert Maxwell Group in the early 1990s, a new regulatory body was created in the U.K. with the passing of the 2004 Pensions Act through Parliament.
As with all the best ideas, they are hopefully borrowed and further built upon. Benefiting from the experience in the U.S., the Pensions Act introduced a PBGC-like body called the Pension Protection Fund and established a new regulator, the Pensions Regulator. This led to the birth of a new principle, that of "sponsor covenant risk," which defined benefit pension plans are required to assess and monitor.
Learning from both U.S. and U.K. corporate failures, the new British regulator recognized the following, seemingly self-evident, but until then ignored risk: "a pension is only as secure as the business or public body standing behind it." On both sides of the Atlantic, the systems were premised on the assumption that companies were longstanding and enduring institutions that didn't fail. Sponsors' vulnerability to ever changing commercial markets was not properly understood. With the benefit of hindsight, it now seems quite obvious that businesses and public bodies can (and do) fail and with them, their pension plans. This creates intergenerational issues, as retired members get what they can from the residual pots but current active employees have no pension and no job — a double whammy.
So, for more than a decade now the U.K. regulatory regime has included the need for plans to assess and monitor the strength of their employer covenant. Large accountants and specialist covenant firms provide U.K. plans and sponsors with ongoing analysis of the credit risk being run with a given sponsor and advice on how to manage it.