The Pensions Regulator (TPR) has issued several statements on the coronavirus section of its website for scheme trustees, employers and administrators – with guidance published on both 20 and 27 March.
In this article, we summarise the key themes emerging from the TPR guidance and what trustees should do in response. But it is important to note:
- the guidance does not replace scheme rules or legal obligations; and
- TPR prefaces the guidance as supporting trustees in difficult circumstances/unprecedented times and that it is not ‘authorising, encouraging or compelling a particular course of action’.
What should trustees of defined benefit (DB) schemes be doing?
- assess whether their business continuity plan is still adequate; and
- work with the scheme administrator on contingency plans to mitigate the impact of increases in work volumes or unavailable staff and agree actions to be prioritised.
The guidance indicates that trustees:
- may want to consider whether current transfer terms remain appropriate or need to be reviewed; and
- should be alert to the increased risk of pension liberation scams in the current environment.
Heightened covenant monitoring and corporate distress
Trustees need to understand the corporate health of their employer and consider any previously drafted contingency plans, as the impact of the coronavirus and the measures taken to contain it have been swift and severe.
The key issue is one of engagement and dialogue with management whilst recognising that this will be complicated by demands on management’s time, as they seek to manage the business and the difficulties in forecasting.
It is important also to distinguish between corporate distress and more generic requests for easements (see below), even if there will be overlap in the information requirement.
Nevertheless, as a key stakeholder, TPR expects management to keep trustees informed with the best available information so trustees can ensure they are treated fairly, relative to other creditors/stakeholders.
Trustees should be questioning the employer in some detail about:
- the impact on the business, for example around demand for the employer’s products/services, supply issues and its business continuity plan;
- liquidity – short term cashflows, key payments in the next three months ;
- the position of lenders – whether they are being supportive, how long current facilities are expected to be sufficient, any restrictions on using available borrowing, next covenant testing dates, etc;
- the position of key suppliers/creditors and credit insurers, and whether any payments are planned to associated entities or shareholders; and
- what Government support is expected to be or is available.
Trustees should take ‘real time’ advice where necessary and, if they don’t take independent advice, they should document their views and decisions.
Scheme funding and investment
Where the current valuation is nearing completion, trustees:
- do not need to revisit valuation assumptions; and
- are not required to consider post valuation experience, but TPR expects them to consider it when agreeing recovery plans and whether provisionally agreed deficit recovery contributions (DRCs) are still affordable.
TPR will not take regulatory action if trustees need more time to consider the situation and delay their valuation/recovery plan submission by up to three months beyond the 15-month statutory deadline.
Requests for suspension or reduction of DRCs
Trustees should be open to requests to reduce or suspend DRCs and adopt the following key principles in considering such requests.
- Establish the need: understand the employer’s cash flow, drivers for the request, and ensure that payments are not to be made to related entities/shareholders.
- Ensure all parties are playing their part: trustee support should be alongside other stakeholders:
- banks being supportive of the business
- putting in place legally binding commitments to prevent dividends/other forms of shareholder return
- no intra-group loans: in exceptional circumstances, it may be appropriate for employers to make extraordinary and essential intra-group payments (to support wider group liquidity/going concern status) which are in the interests of the employer’s ongoing covenant strength. If so, the trustees should understand the intention and ability to recover the funds and seek mitigation
- the scheme should be given a fair share of any new security being granted.
- Ensure they are well advised: this should include covenant and legal advice from advisers with appropriate experience.
- Get the right information, while taking account of what is achievable in the time available.
- where sufficient information is not available to make a fully informed decision, any agreement should be for as limited a period as possible (up to three months) while appropriate information is being provided
- agreement should be conditional on full and ongoing provision of information so trustees can monitor the covenant. The less confidence the trustees have regarding access to timely/relevant information, then the shorter the agreement
- carefully consider any requests which are substantial – eg annual or large one-off contributions
- longer extensions supported by appropriate information on the business case may be appropriate where other creditors commit to support for longer periods and restrictions on trustee extensions would limit that support
- longer extensions should ideally be underwritten by any available protections.
- Have a flexible ability to restart making DRCs: given the difficulty in forecasting, any suspension should have an end date but also triggers to restart if trading returns to normal.
As well as any covenant/restructuring advice, trustees should take legal and actuarial advice on whether a suspension/reduction is appropriate but also on the most appropriate method (amendment to SoC or short-term suspension without amendment to SoC). This will avoid accidental triggering of wind-up of scheme.
Suspended or reduced contributions should ideally be repaid within the current recovery plan timeframe.
Requests to suspend or reduce future service payments are to be treated in a similar way to DRCs, with recommendation that legal advice is taken to ensure allowable under scheme rules.
TPR says it will be pragmatic in relation to employer requests, provided that employers do the following:
- justify the need for such arrangements;
- provide a plan for DRCs to be caught up and to mitigate any detriment caused to the scheme;
- ensure the scheme is treated fairly compared with other stakeholders, eg shareholders; and
- document their position regarding the treatment of their schemes.
Request for release of security
TPR cautions that requests to release security are unlikely to be in the best interests of members and that trustees should take appropriate specialist advice and carefully consider such requests in full knowledge of the facts and implications.
The guidance sets out areas that trustees should review including:
- their scheme’s cashflow requirements and how they expect those obligations to be met;
- specific risks which may now exist in the portfolio or the employer’s business;
- future implementation of previously agreed investment and risk management decisions; and
- investment governance structures and delegations to ensure they can continue to function and make decisions in the event of trustee incapacity or absence.
Advice and governance
As noted above, TPR recommends that trustees consider whether real time, specialist covenant advice is required in the circumstances. It notes the importance of employers providing trustees with the information they need (or, at least, whatever can reasonably be provided) in a timely manner and treating the scheme fairly compared to other stakeholders.