Friday July 10, 2020

Gerald Smith, FRP Pensions Advisory Partner shares his insight on the challenges facing the pensions industry

The issues facing the trustees of pension schemes as a result of the coronavirus pandemic are well reported and The Pensions Regulator has provided consistent guidance to trustees, employers and their advisers on the risks that should be focused on in order to protect pension savers.

From ensuring benefits are paid to encouraging employers to continue to contribute to pension schemes, there are a number of issues for trustees to keep abreast of. Here we speak to Gerald Smith, Partner in our Pensions Advisory team, to better understand the challenges facing the pensions industry and to ask if the tide is turning once again in favour of the employer.

Are pension trustees facing new challenges as a result of the coronavirus pandemic?

Gerald: The challenges facing trustees are not new, but they have certainly been heightened as many businesses feel the impact of the coronavirus pandemic. The primary challenge facing trustees has always been, and will continue to be, ensuring the employer fulfils its obligations to its members. This is their primary responsibility.

What’s changed in recent months as a result of coronavirus is the position of the employer. In many ways, the challenges facing trustees are the same as those they faced in the aftermath of the financial crisis in 2008 and 2009, and more recently with Brexit. The common thread is uncertainty and, when uncertainty sets in and businesses begin to waver, the challenges facing trustees tend to increase.

How do pension trustees overcome these challenges?

Gerald: The most important thing is for the pension trustees to have a strong working relationship with the employer. If there is a financial issue, it is the responsibility of the management team to address it and deal with the concerns of their company’s creditors – of which the pension trustees are one – but there is no denying that many employers are currently experiencing very difficult circumstances.

The coronavirus pandemic has caused a great deal of uncertainty and many employers, across almost every sector of the economy, have little visibility of future income and this makes planning all the more difficult. For those businesses that are not financially robust, or perhaps those that are in some of the worst-hit sectors, employers are still required to meet the legal obligations to their scheme. This means making scheduled contributions where those need to be paid.

Are employers able to request a suspension of contributions?

Gerald: Whilst a suspension on scheduled contributions is an option, it can actually cause more problems for the employer further down the line and, as a result, many trustees are rejecting this type of request. If an employer is not in a situation to pay the scheme now, there is no certainty that in three to six months’ time it will be in a better position. This gives trustees a quandary and, if it’s not clear that an employer will be able to repay after a suspension, there will be questions asked as to whether they should be requesting it in the first place.

Ultimately, trustees are interested in the long-term sustainability of the business and they will need to have an honest conversation with the management teams of those businesses whose future looks in doubt.

How can pension trustees support employers?

Gerald: Whilst trustees don’t have much opportunity to provide direct support to employers, communication is key and they should put themselves in the employer’s shoes. If a suspension of contributions is requested and subsequently denied, it is important that the employer knows why and understands the reasons behind the decision. There may be other ways to address employers’ issues and regular meetings and direct communication with the business’ finance teams may help to mitigate against a situation escalating if the business finds itself in difficulty.

Likewise, it’s vital for management teams to proactively communicate with their creditors. Many of the management teams we are working with are addressing problems and asking for advice – they are explaining to trustees what they are doing and how it will work, which is a positive approach to dealing with such issues.

In recent years there has been a shift in the requirement of pension schemes to focus on the needs of the trustees. Do you think we’re going to see the tide turn and attention move back to focus on the needs of the employers?

Gerald: When the Pensions Act 2004 first came into force there was a clear onus on the employer’s responsibility towards the pension scheme and its trustees. This focus changed in 2008-9 when The Pensions Regulator reiterated that trustees had a responsibility not only for the scheme’s employees, but for the employer too. At this point, trustees were asked to act more pragmatically and this changed the balance so the industry saw an increased duty of care towards employers.

Recent developments have seen The Pensions Regulator raise the bar again and ask employers to ensure they’re treating the pension scheme equitably – and this could well be the missing piece of the puzzle. If a business is paying its pension scheme £1 million, but it has also just paid shareholders £10 million, is that equitable? There are cases in the market where the dividends paid are putting both the business and its pension scheme at risk and funding strategies must recognise this.

What will this mean for the industry?

Gerald: It’s a positive step forward and creates more balance as it recognises the needs of the pension scheme, but also makes sure management teams understand that if they behave equitably then it works for everyone. It means there are checks and balances in place that seek to ensure pension schemes are not propping up businesses, and businesses are not putting their pension schemes in jeopardy.

There has been a lot of speculation in the media recently around superfunds – could these be a gamechanger for the sector?

Gerald: The development and use of superfunds is very new territory and something we are watching closely. At this stage, it is difficult to see whether superfunds will be able to deliver on what they are promising as no one knows if trustees will become comfortable with the covenants of a deal type that has not been done before. That said, they could provide the opportunity that some trustees have been seeking – perhaps in a situation where the business model is fundamentally flawed and as a result moving the pension scheme into a superfund ringfences and aims to protect those funds. It is certainly a development the industry will continue to have its eyes on.

FRP’s Pensions Advisory team is a member of the Pension Protection Fund’s (PPF) Trustee and Support Services panel. The new panel, which was formed in May 2020, is designed to provide support to trustees of schemes whose sponsoring employer is in stress or distress. FRP is one of 11 specialist firms appointed to provide expert advice where a sponsoring employer is in stress or distress or expected to enter a PPF assessment period, and the team will advise on areas including covenants, restructuring, contingency planning, and moral hazard, and provide transactional expertise.

If you would be interested in discussing any of the issues raised within this article further please contact Gerald on gerald.smith@frpadvisory.com.