Summary
The Pensions Regulator (“TPR”) has updated its guidance for trustees and employers in situations where the employer needs to request a suspension or reduction of deficit-reduction contributions (“DRCs”).
Trustees should treat requests to suspend or reduce payments for future service benefits in a similar way as requests to reduce or suspend DRCs and should consider whether to take legal advice in these circumstances.
Employer covenant – due diligence
TPR expects that, for many schemes, trustees now have greater understanding of the employer’s financial position, including short-term affordability. Employers may well have had discussions with lenders and other creditors and have produced financial projections as part of an updated business plan, reflecting their view of the likely impacts of COVID-19. This should enable trustees to review in more detail the business case for a new or continuing suspension or reduction of contributions. They should ensure that it is appropriate, and that the scheme is being treated equitably with other creditors, before agreeing to the suspension or reduction.
TPR points out that there is a difference between a short-term effect on liquidity and affordability and a longer-term deterioration in the employer covenant. If there is good evidence that the covenant has worsened materially and is not expected to recover in the short term, trustees should consider whether it would be in the best interests of members to obtain a new actuarial valuation, and/or revise the recovery plan, to reflect more accurately the employer’s position.
TPR expects trustees to be open to reasonable requests from the employer but to make an informed assessment of whether it is in members’ best interests to agree, even if similar requests are made of other stakeholders. If the trustees agree that a suspension or reduction in contributions is necessary and appropriate, they should seek protections and other mitigations. These might include:
- all dividends and other shareholder distributions to stop throughout the period of suspension and not to start again until missed contributions have been repaid,
- agreed arrangements for contributions to start again or increase based on appropriate triggers, such as when access to liquidity above a certain level is restored,
- equitable treatment of the pension scheme compared with other creditors – trustees should agree appropriate legally enforceable protections,
- enhanced monitoring of the employer’s and (if applicable) wider corporate group’s trading and liquidity position, requiring that trustees receive appropriate and regular forward-looking and actual financial information to identify changes in circumstances of the employer,
- where possible, reduced or suspended contributions to be repaid within the current recovery plan timeframe and the recovery plan not to be lengthened unless there is sufficiently reliable covenant visibility available to suggest otherwise. TPR expects trustees to take legal and actuarial advice on this as the consequences and impact will be different for each scheme.
Trustees should in all cases consider whether a contribution suspension might result in a write-down of scheme assets if the employer is unable to repay them or would reduce the amount recoverable by the scheme if the employer becomes insolvent.
Trustees should be aware of the terms on which other financial creditors are agreeing concessions to support the employer. Agreeing to concessions outside a co-ordinated support package risks leaving trustees without negotiating power if other creditors seek enhanced protections in exchange for concessions.
TPR expects trustees to enhance the level of covenant monitoring over the short to medium term and the guidance includes a list of questions that should be put to employers. They should consider also whether contingent assets or other protections may be available to support the scheme, particularly if these are being sought by other creditors.
TPR reminds trustees that, if they agree with the employer to amend their funding arrangements, any new valuations, amended recovery plans and schedules of contributions should be completed and submitted to TPR in accordance with legislation and the code of practice on funding defined benefits.
Reaching decisions
TPR recognizes that trustees will be facing difficult negotiations and decisions but expects trustees to follow due process. Trustees should be aware that, if hindsight proves that they made the wrong decision, they will be able to defend that decision if they have:
- obtained as much relevant information as they reasonably could,
- ignored irrelevant considerations and taken into account only the relevant factors,
- taken professional advice where appropriate,
- acted in accordance with the provisions of the trust deed and
- made the decision in good faith.
Trustees need also to keep full records of the decision-making and how they reached their conclusions.