The Pensions Regulator (tPR) has made a clear statement, that in these challenging times, flexibility will be required as a means of helping to get employers back on track.
It’s important for pension scheme trustees to remember that employers will be impacted in a large range of ways, both operationally and financially, so there will not be a one size fits all approach to navigating the unfolding economic crisis.
Many trustees will receive requests to suspend or reduce contributions over the coming weeks and months. This will be of particular concern where lump sum annual payments are due or upcoming.
Requests are likely to be time-critical, so any reduction in contributions should be as short as possible and no longer than three months. Initially, employers will not be in a position to forecast when payments can be restarted and the missed payments recovered. Trustees are also unlikely to be able to produce a revised schedule of contributions in the time available but should ensure any documents required are put in place to avoid an automatic winding up of the scheme.
Any deferral of contributions should be part of a wider support package that the employer is receiving from government initiatives, funders, shareholders and other connected parties. As such, businesses will need to ensure that the scheme is being treated fairly.
As a key stakeholder, trustees should receive information, such as a regularly updated 13-week cash flow forecast, as soon as it is available. Once more, visibility of the employer’s trading beyond short-term plans for recommencing and recovery of contributions should be formally put in place. There will be many mechanisms that can be used to trigger and calculate contribution increases, including those linked to profit and cash flow.
It is also important to take proportionate covenant, legal and actuarial advice at the appropriate times. A useful set of guidance has been prepared by tPR on the enquiries trustees should make of their supporting employers.
Most employers will be exploring the government support which is available to them. There are grants and deferrals available from HMRC and local councils but these forms of support are unlikely to impact on the overall employer covenant.
There is also the potential option to take on additional debt supported by a government guarantee to the lender. Taking loans of this kind may adversely impact employer covenant. However, assessment of any impact on the overall employer covenant will be challenging. Given current circumstances, trustees may find that they have limited time to respond to the changing position of the employer.
Trustees in the 15-month post-valuation period can utilise an informal additional three-month grace period. Where contribution levels have been agreed in principle, it will be important to consider if these remain affordable given the additional cash demands on many employers.
If you are earlier in the valuation cycle and assessing the overall employer covenant, there may be a need to delay this assessment until the impact on the employer becomes clearer. Extensions in accounts filing dates, may also delay the key information on which covenant assessments are based.
While most scheme administrators are generally working from home with minimal impact on services, if all or part of a scheme’s administration is undertaken by the employer, contact should be made to ensure processes remain in place to deliver critical services such as pensioner payroll. The key is to engage early so that contingency plans can be put in place if required.
Urge any members looking to transfer out of a scheme to be extremely cautious in the current climate – the risks of unscrupulous advisors and scams still exist. You may wish to suspend providing transfer value quotes as tPR has confirmed that it won’t take action against trustees who decide to suspend providing transfer values over the next three months.
FRP is on hand to support businesses through the ongoing challenges of COVID-19. If you have any questions about your pension scheme, please do not hesitate to contact us.