Post-pandemic pensions problems

Initial lockdown may now be drawing to a close, but in the pandemic climate, it appears that cash is king for the sponsoring employers of pension schemes. Many scheme employers are emerging from the quarantine period with an eye to the economy and are seeking to preserve cash given the various trading and liquidity pressures currently facing them. Set out below are some hot topic considerations:

• Review of Scheme Rules and Scheme Administration – It may be possible that within the drafting of a scheme’s trust deed and rules there has been a concept of employer contribution “holidays” (or suspensions) or employer contribution reductions in certain circumstances. Trustees and Employers alike may wish to review the terms of the Trust Deed and Rules, and where relevant, may seek to make amendments to this end. Some Employers may also wish to suggest a delay to the payment of Scheme expenses, or alternatively, move these obligations on to the Scheme (either on a temporary or permanent basis). When considering any such decision, the impact that this may have on the scheme’s funding position should be considered. Any such amendments will need to be permitted by the amendment power and assessed by the Trustees, who will need to balance their awareness of the employer’s distressed status with their fiduciary duties to act in the best interests of Members.
• Suspension of Deficit Reduction Contributions – The Pensions Regulator, has reported that in the wake of COVID-19, a small proportion of employers have sought, or are currently seeking to suspend or reduce their Deficit Repair Contributions (DRCs), or to extend the period over which they are made. The Pensions Regulator acknowledges that this may be an appropriate solution for Schemes, but employers should be aware that the Pensions Regulator recommends that Trustees interrogate employers’ motivations and undertake due diligence into the financial position of employers. Overall, the suspension of these contributions should only ever be a short term solution, and should not be approached as a solution to scheme funding strain.
• Contingent Security – In order to make or to increase contributions to the scheme, to get a deferral agreed, or to extend the period over which recovery payments an employer may propose offering a form of contingent security (such as a parent company guarantee, or a charge over assets or property) to the scheme, either in place of or in addition to its usual contributions. The typical considerations should be made in respect of such offers of contingent security, and there may be some negotiation between the employer and trustees. Employers should be aware that the Pensions Regulator has encouraged trustees to undertake thorough due diligence in respect of this.
• Restructuring – Another potential avenue for cost control and cash flow preservation for many sponsoring employers may be corporate reorganisations to streamline their business model. However, we would caution corporates to carefully consider any pensions implications before acting, especially in relation to circumstances that may trigger a section 75 debt and would strongly recommend that robust legal guidance be sought before any such decision is made.

For companies and schemes in the process of finalising their actuarial valuations and PPF levies who have been affected by delays, the Pensions Regulator has confirmed that the 15 month deadline before the Pensions Regulator will take action may be extended by an additional three months.

If you are a scheme sponsor and would like further information, please contact Claire Bell.