The Covid 19 pandemic has impacted many aspects of lives. These unprecedented times continue to pose economic and operational challenges for pension schemes – trustees’ and sponsoring employers of defined benefit arrangements (DB) alike are grappling with a “once in a century” occurrence. There are a myriad of considerations – managing risk to DB schemes, ensuring pensioners are paid on time, effective and timely communication with all members, open dialogues with employers and advisers, conducting remote trustee meetings – the list goes on.
The role of a DB pension scheme trustee has never been so important as it is now. It is imperative that you do your best to keep matters running and under review. Asking questions of your advisers is to be encouraged in these challenging and unprecedented times. Spending time on the detail now will assist over the coming months and as always, evidencing good governance is all important.
Guidance from the Pensions Regulator (TPR)
TPR has published several pieces of key guidance for DB schemes which outline its package of measures to safeguard pensions through these unprecedented times. At the time of writing this guidance includes:
- DB Scheme funding and investment: COVID-19 guidance for trustees;
- DB Scheme for funding: COVID-19 guidance for employers;
- Guidance for DB scheme trustees whose sponsoring employers are in corporate distress; and
- COVID-19: an update on reporting duties and enforcement activity.
The clear message coming through from TPR is that the pressure caused by COVID-19 has permeated every aspect of the pensions’ industry. As such, steps have been taken to reduce the regulatory burden on trustees and employers and TPR has committed to taking a “reasonable, pragmatic and proportionate approach” to its regulatory work during COVID-19. However, it does expect trustees to “do the right thing” for their situation and members within the boundaries of the law (to include trustees’ fiduciary duties, obligations under the trust deed and rules and legislation).
In this article we look at
some key aspects of this guidance and how it impacts the on trustees and
employers alike:
Valuations
TPR does not expect trustees who are close to completing their valuations to revisit their valuation assumptions. However, it is obviously imperative for trustees to consult their actuary as soon as possible in order to determine whether it would be in members’ best interests to proceed based on pre-pandemic assumptions.
If trustees need more time to consider the scheme’s and employer’s situation, they may decide to delay their recovery plan submission by up to three months, and in that case, although TPR cannot waive trustees’ statutory obligation, it will not take regulatory action in respect of a failure to submit.
Funding – reducing or suspending contributions
If the employer is very financially weakened, it might be appropriate in some circumstances to allow a reduction or suspension of deficit repair contributions . Key questions about a reduction or suspension of contributions will relate to the affordability of contributions and how other stakeholders are being asked to share the pain. Trustees should refer to TPR’s specific guidance in relation to corporate distress in response to COVID-19 – this includes a list of key questions to ask the employer and principles to keep in mind when considering requests to delay deficit repair contributions. Trustees should also refer to their trust deed and rules in order to ensure that a suspension or reduction of employer contributions does not lead to unintended consequences in terms of a scheme’s winding-up rule. Consideration should also be given to what the other side of the pandemic may look like and steps that can be taken now to mitigate the effect of a suspension or reduction.
Employer covenant
As well as establishing clear channels of communications with the employer, trustees of DB schemes should also consult their covenant adviser at an early stage in order to understand the impact on an employer’s financial covenant. It may be that the employer’s industry has been hit particularly hard by the pandemic and therefore trustees will want to be kept apprised of the employer’s contingency planning whilst it weathers the storm. Considerations such as liquidity, cash flow and trading projections and the trustees reaction to these in terms of funding and investment strategies should be at the forefront of all parties’ minds. Trustees should seriously consider forms of non-cash support if possible (e.g. contingent assets/negative pledges) in order to alleviate the reliance on the employer’s financial covenant.
Investment
Trustees of DB schemes should consult their investment advisers in order to assess the appropriateness of their scheme’s investment strategy in the current situation. Any reduction in funding or indeed the strength of the employer’s financial covenant will undoubtedly mean looking at current investment portfolios, and whether a re-balancing is needed following market movements. Liquidity of DB scheme assets also needs to be analysed – pensions must continue to be paid but of-course significant death benefit cash outlays may also spike. The practicalities and timing of realising assets needs to be tested. Whilst not immediate concerns, the pandemic should also force trustees to look at mortality assumptions, investment governance and diversification.
Existing contingent assets/guarantees
Trustees should take advice on existing contingent assets and guarantees, particularly where there has been a downgrade of an employer’s credit rating. Quite often the documentation underpinning this type of security will have trigger clauses which seek to crystallise the value of such arrangements. TPR also warns DB trustees against the perils of releasing such security in order to help distressed employers. Legal and covenant advice should be sought in such a situation in order for trustees to understand how relinquishing such security would affect covenant and whether similar requests are being made of other secured creditors. DB schemes should be treated equitably with other creditors – no exceptions.
Administration
Administrators should be asked to provide details of their business continuity plans. It is vital for DB scheme administration processes to continue as best they can – this includes the payment of pensions and other benefits, processing and prompt investment of contributions transfer value payments (to avoid claims for losses caused by delays), and processing retirements. TPR tells trustees and administrators to report to TPR immediately if they believe they will be unable to pay members’ benefits. Where administrators find themselves under-resourced, trustees should be discussing which activities should be prioritised. TPR suggests that these might be paying benefits, processing retirements and paying death benefits. Trustees should also understand whether administrators are able to continue operations fully, remotely or are there limitations? Are they able adequately to cover staff on sick leave? Will helplines remain open? If alternative processes are to be used trustees should be aware of the need to comply with data protection laws.
Trustees should also be aware of ‘force majeure‘ clauses in service provider contracts – triggering such a provision can mean that an administrator is able to cease to provide service. Again legal advice on these provisions is essential so that trustees know where they stand.
Transfer values
Trustees may suspend cash value equivalent transfer value (CETV) quotations and payments to give themselves time to review CETV terms and/or assess the administrative impact of any increase in demand for CETV quotes. Trustees should give careful consideration to this course of action and have clear reasons for doing so which are in the best interests of members. Any suspension of CETV transfer values would not attract regulatory action from TPR for the next three months – however, any breaches must be reported to TPR. TPR has stated that the Pensions Ombudsman will take TPR’s guidance and the current exceptional circumstances into account when considering complaints. Trustees should also give greater attention to the heightened risk of members being targeted by scammers and unscrupulous financial advisers.
Trustee arrangements
Scheme business must continue and virtual trustee meetings are likely to be the norm for the foreseeable future. Whether these are conducted by telephone or video conference will differ depending on the technology available, but preparation is key and dry-runs should be encouraged in order to ensure that all trustees are comfortable with any new technology.