The Regulator’s guidance in relation to Covid-19


1st May 2020

The Pensions Regulator (“TPR”) has been issuing guidance to help trustees ensure that their schemes can withstand the impact of Covid-19.

Reporting duties and enforcement activity

TPR is adopting a more flexible approach to what trustees should report to them and when enforcement action would be appropriate under the current circumstances.  If there is a breach of legislation that will be rectified within three months, and it does not have a negative impact on scheme members, there is no need to report the breach to TPR, though trustees should keep records of the decisions made and actions taken.  Initially these easements are in place until 30 June 2020.

The areas covered by this easement include:

  • the quotation of transfer values,
  • delays in reviewing statements of investment principles,
  • delays in finalising trustees’ reports & accounts,
  • delays in finalising actuarial valuations,
  • late payment of deficit-reduction contributions to defined benefit schemes.

Transfer value quotations

Trustees may decide to suspend transfer value quotations and payments, for up to 3 months, to give themselves time to review the transfer value basis and assess the administrative impact of any increase in demand for transfer value quotations.  If trustees consider it appropriate to continue the suspension after three months, they should notify TPR of the fact.

Updated guidance at the end of April states that, in addition to the normal risk warnings that have to be issued with transfer value quotations, TPR now requires trustees to include a letter, issued jointly by TPR, the FCA and the Money & Pensions Service (“MAPS”).  The letter sets out some of the issues that members should consider before transferring their defined benefit pension, including how to identify a potential scam.

Deficit-reduction contributions

Some employers may need to reduce – or suspend – deficit-reduction contributions (“DRCs”) for a period during the pandemic.  TPR says that it will follow a pragmatic approach in such cases provided that:

  • the need for reduction or suspension can be justified;
  • a plan is made for missed payments to be made up;
  • a plan is agreed for mitigating any detriment caused to the scheme and
  • the scheme is being treated fairly compared with other stakeholders. In particular, TPR expects dividends to have ceased.

Trustees should agree to such requests for as limited a period as possible if they do not have the time or the information to conduct a full assessment of the employer’s covenant.  They should monitor the covenant throughout the period.  TPR expects all DRCs still to be paid within the existing recovery period unless the recovery period is particularly short and it is reasonable to rely on the employer’s covenant beyond that time.

Trustees should seek a legal commitment that no dividends (or other distributions to shareholders) will be paid until DRCs are resumed and arrears paid.  They should note, also, how other creditors are supporting the employer, in order to ensure that the scheme is being treated equitably.

Request to release security

Where employers ask trustees to release security, such as a legal charge or a parental guarantee, the scheme will have lost access to a potentially valuable asset should the employer not recover.  Thus, such a release is unlikely to be in members’ best interests.

TPR expects employers to provide trustees with a business plan and forecasts, detailing why the request is being made, so that trustees can assess whether such action is in the best interests of members.  Before agreeing to such requests, trustees should fully understand how relinquishing security would affect the covenant and understand what requests are being made of other, secured creditors.  TPR expects schemes to be treated equitably with other creditors.  If possible, trustees should obtain some sort of alternative security or mitigation from the employer.

Actuarial valuations

TPR does not expect trustees to revisit assumptions for valuations that are near to completion.  However, trustees may consider it is in members’ interests to do so.  TPR does expect trustees to consider post-valuation experience when agreeing their recovery plan, in the context that the employer’s affordability may now be constrained.  If necessary, trustees may delay their recovery plan submission by up to three months, in which case – as noted above – TPR will not take regulatory action in respect of the delay.

Investments

Trustees should:

  • review how benefit cashflows are to be met, including potential unforeseen payments such as transfer values,
  • consider whether decisions already made but not implemented are still appropriate and
  • assess whether they should make changes to their investment and risk management governance framework.

However, in our view it would be rash to change investment strategy at a time when values are so volatile.