Sponsoring employers should be evaluating their risk positions for the pension scheme just as they will be doing with the rest of the business, establishing more formal building structures of commercial values, relationships and robust management of information systems and not forgetting to make better use of their advisers.

Pensions related concerns for UK companies currently relate to having control over cash, risk and the relationship between cost and added value.

The cycle of funding agreements to defined benefits pension schemes in the UK comes round every three years following a valuation by the scheme actuary. The agreement is a result of negotiation between the sponsoring employer(s) and the trustees. If a shortfall has to be made up a recovery plan is also agreed.

Trustees are required to act prudently and independently and are required to take account of the employers specific circumstances of the scheme, including the ability and willingness to meet its financial commitments to the funding of the scheme and recently huge amounts of cash have been poured into defined benefit schemes.

However, employers and trustees should be mindful of what actual figures they are looking at and how the assumptions used relate to their specific funding models. Pension liabilities for accounting purposes are calculated using the yields on long-dated AA corporate bonds that, because of the credit crunch, were at historically high levels relative to the yields on government bonds (gilts) generally used by defined benefit trustees to calculate liabilities for funding purposes. It is an anomaly but the economic down turn actually artificially reduced pension scheme liabilities as the higher the yield, the lower the calculated liabilities.

Employer's covenant strength and cashflow affordability are two of the most important issues that trustees have to get to grips with and understand. Also trustees should be mindful of the use of contingent assets and guarantees to protect the security of the pension scheme if the employer has short term cash flow issues but has a strong covenant. Back end loaded recovery plans will be more palatable if accompanied with some guarantee from the scheme sponsor. The Pensions Scheme Regulator has emphasized that the best security for a pension scheme comes from having a strong employer and that trustees should not weaken the ongoing covenant of that employer by making unrealistic demands on employers that could potentially weaken the scheme sponsor.

There are many ways that trustees can review the strength of the employer. This depends on the financial capabilities of the trustee board. There are many organizations that can assist trustees to give an assessment of the strength of the employer to facilitate sensible funding plans including the extent to which flexibility can be built in to existing funding plans, the use of back-end loading, and/or extending the period over which any deficit is to be removed. The Regulator has recently taken great care to stress that it will support measures like this in circumstances where, in the short-term, affordability is in doubt or existing funding agreements are a threat to the company's future.

There is growing recognition of the need to address conflicts that arise in using the same firm of advisers for both the company and the trustees. Additionally, it is essential to connect funding negotiations with covenant and affordability assessments, as well as risk management and investment strategy.

Companies have ploughed huge amounts of money into pension schemes that they sponsor not to mention funding the Pension Protection Fund to assist members of pension schemes whose scheme sponsor has failed.

Cash has been thrown at the problem without the underlying risks necessarily having been removed.

It is essential to understand what risks a pension scheme might pose to the business that sponsors it, and then decide whether these risks are wanted or unwanted, acceptable or unacceptable and decide if these risks impact on the balance sheet, P&L, credit rating, share price, distributable reserves, cashflow, company valuation etc.