On 27 March 2020, the Pensions Regulator (“tPR”) issued further guidance in response to the ongoing Covid-19 outbreak. The guidance is prominently sign-posted on tPR’s website and includes:
• guidance for trustees on defined benefit (“DB”) scheme funding and investment;
• guidance for employers in relation to DB scheme funding;
• guidance for DB scheme trustees whose sponsoring employers are in corporate distress; and
• guidance relating to defined contribution investment.
Of particular relevance to employers will be the guidance relating to DB scheme funding. This guidance sets out what tPR expects of sponsoring employers, whilst also setting out the flexibilities that tPR is offering to employers in order to ease the burden during this period.
In some respects, tPR’s guidance on DB scheme funding will offer a source of comfort to employers during these uncertain times. TPR acknowledges that these are “extremely difficult times for many businesses, with significant uncertainty around trading continuity, staffing, and the longer term implications for a number of sectors“. TPR also offers reassurance to employers that it will take a pragmatic and proportionate approach to its regulation of scheme funding during this period and will continue to reflect the prevailing market conditions in its operational processes.
However, the guidance is clear that employers should not use the ongoing uncertainty as a reason to divert attention away from their responsibilities in relation to scheme funding. TPR highlights the need for employers to keep trustees of DB schemes up to date on the employer’s financial outlook and contingency planning. There is also a clear direction from tPR that it expects employers to make all reasonable efforts to provide trustees with the information needed to allow them to assess the impact of the Covid-19 outbreak on the employer covenant and the affordability of deficit repair contributions (where relevant).
TPR acknowledges that the Covid-19 outbreak may lead to some employers asking trustees to agree to previously unforeseen arrangements (such as the deferral of deficit repair contributions, or additional debt being secured over employer assets). TPR suggests that it will take a pragmatic approach to such arrangements, provided that:
• the need for them is justified;
• a plan is made for deferred deficit repair contributions to be caught up;
• a plan is agreed for mitigating any detriment caused to the scheme (although tPR accepts this may not always be possible and any decision to proceed without mitigation should be made in accordance with trustees’ fiduciary duties); and
• the scheme is being treated fairly compared with other stakeholders.
In relation to the above, tPR strongly recommends that employers document their position regarding the treatment of their scheme.
In terms of future developments, tPR states that these regulatory easements will be maintained until 30 June 2020, but will be reviewed as matters progress. Employers should pay attention to the release of tPR’s annual funding statement, which is scheduled for publication after Easter 2020 and which will provide further guidance in respect of schemes undergoing significant changes as a result of Covid-19.
To read our full update on the guidance issued by tPR, please visit our website (https://www.mayerbrown.com/en/perspectives-events/publications/2020/03/uk-pensions-regulator-guidance-on-coronavirus).
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