The Pensions Regulator ("tPR") has released guidance on issues which occupational pension schemes may face as a result of disruption caused by COVID-19.
TPR is stating that it will take no action if trustees suspend submitting scheme valuations and/or suspend quoting and paying CETVs for up to 3 months.
TPR is also saying that trustees "should" agree to employer requests to suspend deficit contributions, but only if certain conditions are met – and, in particular, only if dividends, distributions and most intra-group payments are suspended, and only if lending banks and other creditors remain supportive of the employer.
There are 5 different sets of guidance:
- for all schemes:
- an update for trustees, employers and administrators;
- for DB schemes:
- guidance for trustees on scheme funding and investment;
- guidance for employers on scheme funding;
- guidance for scheme trustees whose sponsoring employers are in corporate distress;
- for DC schemes:
- guidance for trustees on scheme investment.
TPR's page also links to guidance issued by the Pensions Advisory Service aimed at savers, on how coronavirus may affect pension investments.
TPR guidance is not law, but tPR tends to approach its guidance on the principle of "comply or explain". If your scheme runs into trouble or attracts tPR's attention, you are more likely to find a sympathetic ear if you have complied with tPR's guidance.
- Trustees should talk to their administrator to understand what level of service the administrator can currently provide, and agree with their administrator what will take priority if there is under-resourcing. TPR wants pensioner payments, processing of retirements and processing of bereavements to take priority.
- If pensions cannot be paid, administrators and trustees need to tell tPR immediately. All other reportable events should be reported as usual, and tPR will take a pragmatic view, recognising the extraordinary circumstances.
- DB schemes finalising their valuation now can delay submitting scheme documentation to tPR for up to 3 months, without tPR taking regulatory action. Schemes finalising their valuations now need not revisit their assumptions or take into account post-valuation experience in the light of the market disruption caused by coronavirus, but should ensure that contributions are affordable by employers in the current circumstances.
- TPR will not take any action against trustees who suspend quotation and payment of CETVs for the next 3 months.
- Trustees "should" agree to employer requests to suspend deficit contributions, but only if certain conditions are met (see below). In particular,:
- the employer must enter into a legally binding agreement not to pay any distributions or dividends;
- the employer must not pay any intra-group transfers unless the trustees understand the rationale and such transfers are covenant-enhancing; and
- unless the trustees have full visibility of the employer covenant, the suspension must not be for more than 3 months.
- If their employer is in financial difficulties, trustees should understand the employer's covenant and business plan as much as possible, take appropriate advice, and ensure that other creditors (such as banks) are being supportive, before agreeing to any request to suspend contributions.
- Trustees of DB schemes should review their investment portfolios, particularly to look at:
- whether cash flow requirements can be met;
- whether action is needed to manage specific risks which may now exist within their portfolios, such as exposures to deteriorating sectors, credits and counterparties; and
- whether previously agreed investment and risk management decisions should still go ahead.
- TPR has published a list of questions which trustees should ask of employers where the employers are in distress.
- TPR has published a list of factors which the trustees of DC schemes should consider in relation to scheme investments. In particular, they should consider whether a communication to members would be appropriate.
Update for trustees, employers and administrators
The update reflects the fact that administrators will be stretched by a combination of staff working from home, and staff sickness. The update asks trustees to talk to their administrator to understand what level of service their administrator is able to provide, and to agree with their administrators which activities need to be prioritised in the event of under-resourcing – starting, of course, with pensioner payments, and processing retirements and bereavements.
It asks trustees and administrators to tell tPR immediately if they believe that they will not be able to pay pensions as usual. It goes on to say that anything else which is reportable should be reported in the normal way, and that tPR will take a pragmatic approach in its response.
Finally, the update explains that tPR is suspending all of its regulatory initiatives, including consultations, and has cancelled or moved all scheduled events.
DB schemes: Guidance for trustees on funding and investment and guidance for employers on scheme funding
Scope of the guidance
Trustees should note that the guidance on funding and investment does not supersede trustees' duties under their scheme's rules or under the law. However, tPR's guidance is helpful and trustees should take it into account as part of their decision-making process.
TPR notes that many schemes will have experienced falls in funding levels driven by falls in investment markets and decreases in yields. These may be very significant.
Funding – key points
Schemes finalising their valuations now: If a scheme is finalising its valuation now, tPR does not expect trustees to revisit their valuation assumptions, and the guidance notes that trustees do not have to take into account post-valuation experience. In other words, the valuation assumptions can – but do not have to – ignore the effect which the coronavirus outbreak has had on asset and liability pricing (and on longevity). TPR does however expect trustees to consider current circumstances when assessing whether the employer can afford the provisionally agreed contributions. TPR has said that if trustees need more time to consider the situation, trustees can delay submitting their scheme funding documentation for up to 3 months after the statutory deadline, and that if trustees do this, tPR will not take regulatory action in respect of a failure to submit.
Employers who ask for contribution holidays: Trustees "should" grant employer requests for contribution holidays, if the following circumstances apply:
- trustees are either able fully to assess the employer's covenant in line with tPR's guidance (see below), or the contribution holiday is for no longer than 3 months;
- the employer agrees to "full and ongoing" provision of employer covenant information;
- banks and other funders are being supportive and the employer is making no dividend payments or distributions (the guidance does not say what tPR's approach is to interest payments made to lenders). The suspension of dividend payments and contributions should be underpinned by legally binding commitments. In "exceptional" circumstances it may be appropriate for employers to make "extraordinary and essential" intra-group payments, but trustees should understand the intention behind the payments and the expectation and ability of employers to retrieve funds, and trustees should also seek mitigations. When looking at intra-group payments, trustees should assess whether or not to allow them (at the same time as allowing a suspension of contributions) by the effect on the employer's ongoing covenant strength;
- contributions are "ideally" made up within the current recovery plan timeframe, and the current recovery plan will not be lengthened unless there is sufficiently reliable covenant visibility;
- if the request is to suspend or reduce future service contributions (as opposed to deficit recovery contributions), tPR states that the same principles will apply but suggests that trustees take legal advice.
Employers who ask trustees to release security
TPR considers it unlikely that agreeing to an employer request to release security will be in the "best interests of members", and tells trustees to take appropriate specialist advice. TPR asks trustees to contact it if they are concerned about a request.
Provision of information
TPR asks employers to continue to provide trustees with the information which trustees need (or which in the circumstances can reasonably be provided).
TPR says that trustees should be alert to scams, and it will not take any action against trustees who suspend quotation and payment of CETVs for the next 3 months.
TPR notes that pension schemes generally have long-term investment horizons and many schemes and employers will have the ability to trade through the current challenging market conditions. However, tPR recognises that there are some significant short-term risks for all schemes and some significant medium to longer-term risks for schemes where the employer's longer-term prospects will be challenged. TPR states that trustees should review with their advisers, what actions (if any) might be necessary.
TPR suggests that trustees should consider the following:
- review their scheme's cash flow requirements and how they expect those obligations to be met. There may be changes in member behaviour, such as increase in transfers out and early retirements;
- review and manage specific risks which may now exist within their portfolios or within their sponsoring employer's business, e.g., concentrations of risk and/or exposures to deteriorating sectors, credits and counterparties;
- review any previously agreed investment and risk management decisions due to be implemented in the future. This is to ensure they remain appropriate, efficient and do not introduce risks or crystallise losses;
- review their investment governance structures and delegations to ensure they can continue to function and make decisions in the event of trustee incapacity or absence;
- assess, following the recent performance of their scheme, whether they should make any changes to their investment and risk management governance framework.
TPR also says that trustees should be mindful that market dislocations can also present opportunities. They should consider with their advisers how they might evolve their investment strategies or arrangements at an appropriate time. Some of these opportunities may involve:
- value enhancing investment opportunities;
- value preservation activities, for example through proactive management of deteriorating risks; or
- where funding levels permit, risk transfer opportunities through buy-in or buy-out activities.
DB Schemes: Guidance for trustees whose employers are in corporate distress
TPR's guidance consists of a list of questions which trustees should ask employers, to help focus discussions. The questions focus on the employer's business, cash flow, business continuity plan, payments and covenant. They are intended to help trustees gather appropriate information to be able to have an accurate view of the employer's covenant and prospects, as a starting point for discussions. The guidance notes, however, that in the circumstances employers may not be able to provide information which is as "robust" as it would normally be.
The guidance also looks at the approach it expects trustees to take if an employer asks for a suspension of contributions. Most of the points the guidance makes are the same as in the guidance for trustees (see above). But it focuses particularly on the actions of other creditors: in particular, whether or not the employer's banks are supportive. It also makes the point that trustees should take advice from lawyers and covenant advisers with experience of corporate restructuring.
DC Schemes: DC investment
As with TPR's guidance on DB investment, tPR makes the point that its guidance does not supersede trustees' duties under the law or under their scheme's rules.
TPR notes that some members of DC schemes might have significant levels of exposure to '"risk assets'" if they are in an early accumulation, high-growth phase. Members who are wholly exposed to equity investments may have seen their fund values fall significantly. In principle, most members of DC schemes have long investment horizons and they should be able to tolerate shorter-term volatility. However, headline market falls and individual fund value falls may:
- cause some members to switch their investments and crystallise current market losses
- discourage members from saving and may encourage opt-outs, and/or
- make some members more susceptible to scams promising better returns
In addition, tPR notes that, in a financially challenged environment, some members may opt out of the scheme.
TPR recommends that trustees should consider the following, with their advisers:
- reviewing their member communications: members will clearly be concerned and, in particular, it might be helpful if trustees could highlight the following to members:
- what current market volatility might mean to members retiring over different future time periods;
- the need to think carefully and consider getting investment advice before switching funds in the current market (to avoid crystallising losses);
- the danger of scam activity in the current climate. Trustees should encourage their members to visit MaPS (the Money and Pension Service) for free plain English pensions advice before making any decisions about their retirement;
- the investment strategy and investment mandate rebalancing requirements they currently have in place. In some instances, trustees may feel it is appropriate to suspend or refine these requirements;
- the degree of diversification and the extent of any concentrations of risk. This might be in specific investments or sectors they currently have through their investment arrangements or investment mandates. In some instances, trustees may feel it is appropriate to consider making changes in relation to certain exposures (or levels of exposures) to specific investments or sectors;
- the extent of their exposures to certain counterparties;
- the timing of any pre-agreed asset transitions or fund switches;
- the terms of reference for any subcommittees to ensure that they can continue to function in the event of trustee incapacity or absence. This might include a review of quorate and sign-off/signature requirements;
- the schedule of delegated responsibilities to ensure that activities can be carried out in the event of trustee incapacity or absence, for example where the chair of the investment subcommittee or trustee board is required to authorise disinvestments of certain levels;
- their current investment and risk governance arrangements. Trustees may feel an alternative governance structure might be more appropriate and/or may feel that in the longer term, consideration should be given to consolidating their scheme with a larger provider which might be able to offer members the potential for better outcomes and better support throughout their savings journey.
TPR says that trustees should also be mindful that market dislocations can also present opportunities and should consider with their advisers how they might evolve their investment strategies or investment and governance arrangements at an appropriate time. Some of these opportunities may involve:
- value enhancing investment opportunities;
- value preservation activities, for example, through proactive management of deteriorating risks, or;
- using the dislocation as an opportunity to reconsider future DC benefit delivery and potentially transferring the scheme to a larger, better resourced provider;
Finally, tPR says that they appreciate that some schemes may struggle to meet statutory deadlines or comply with statutory requirements. It says: "We will continue to take a pragmatic approach, using our discretion, where we can, to decide whether it would be appropriate to take action regarding specific breaches."
As ever, if you have questions or would like to discuss the specific circumstances of your scheme, your usual Mayer Brown contact will be pleased to help you.