COVID-19: Pressure points: Pensions Regulator and PPF issue guidance for trustees of DB schemes with distressed sponsors (UK)

The Pensions Regulator has issued further guidance relating to COVID-19. This includes specific guidance for trustees of defined benefit schemes whose sponsor is in or may experience financial distress, as well as more general guidance relating to business continuity and scheme administration aimed at all schemes.

Sponsors and trustees clearly need to be taking immediate steps to assess the impact of the spread of COVID-19 and the measures being introduced to tackle this on the business and scheme and take immediate action to mitigate the risks (where necessary). Whilst the Regulator’s guidance is pragmatic and helpful there are a number of critical issues that trustees need to consider where their scheme’s sponsor is in distress.

Distressed sponsors

The economic impact of COVID-19 and the measures taken to restrict its spread are clearly having a significant impact on many businesses and sectors. As you would expect, in its latest guidance the Regulator stresses the need for trustees of defined benefit (DB) schemes to understand the corporate health of their scheme’s sponsoring employer and consider this alongside any impact of falls in the scheme’s asset values.

The guidance recognises that in the current climate engaging with the sponsor may be difficult and forecasting will be extremely challenging. However, as a key stakeholder, it expects trustees to be kept informed with the best available information, whilst accepting that this may not be as robust as the Regulator would normally expect.

Questions to ask scheme sponsors

The guidance lists a number of questions that the Regulator expects trustees to be asking their sponsor regarding COVID-19. These include:

• In what ways have they considered how the impact of the virus and the measures to contain it may affect:

1. 1. demand for the employer’s products
   2. their business continuity plan - including resource availability, staffing and materials, and
   3. cashflow – the Regulator expects employers to be preparing 13 week cashflow forecasts where there is a significant impact on cashflow.

• Are there any key payment dates in the next three months that will affect the business (e.g. rent quarter dates)?
• What are the positions of lenders? Are there any restrictions on using available borrowing? When will the banking covenant(s) next be tested and is it/are they expected to be met?
• Are funders seeking new security and, if so, what is the impact on the scheme?
• What are the positions of key suppliers and creditors? Have they imposed any restrictions on normal credit availability or supply volumes?
• What payments are proposed to associated or connected companies or shareholders in the next six months? Is this appropriate in the context of the directors’ primary duties to their creditors where there is uncertainty over the solvency of the employer?
• What support is expected to be available for the employer under the package of measures announced by the Chancellor on 17 March 2020? What is the timescale for this and are any key conditions attached?

Trustees should also consider whether contingent assets may be available to support the scheme, particularly if these are being sought by other creditors or concessions are being sought by the sponsor from the scheme.

Requests to defer deficit recovery contributions

Unsurprisingly, the Regulator says that it has seen a rise in the number of sponsors requesting deferral of deficit repair contribution (DRC) payments. Helpfully, the Regulator recognises that such actions may be appropriate in the current circumstances, but it says that trustees should consider any request carefully to ensure that any support given is part of a co-ordinated and fair response across key stakeholders.

Trustees are urged to get clarity on the timing for requests, challenging deadlines which are unnecessarily short and making sure that they receive adequate information to make informed decisions in the time available, including responses to the questions above.

Key principles

The Regulator has outlined several key principles that it expects trustees to keep in mind when considering any deferral request. These are:

Establishing the need

• Trustees need to understand the employer’s cashflow position and drivers for the request.
• Ensuring that payments will not be made to related entities or shareholders.

Ensuring all parties are playing their part

• Trustee support should be alongside other stakeholders.
• In particular, banks should be supportive of the business rather than withdrawing borrowing facilities.
• Where other parties are strengthening their access to the sponsor’s assets through security, trustees should ensure that the scheme is given a fair share of any new security.
• Agreements should be put in place to prevent new dividends or intra-group loans.
• There should be a flexible ability to restart making DRCs.
• Given the difficulty forecasting, any suspension should have an end date but also triggers to restart if trading returns to normal.

Ensuring you are well advised

• This should include covenant and legal advice from advisers with experience in situations of corporate distress and restructuring.
• Getting the right information, taking account of what is achievable in the time available.
• Where timescales are very short, any concessions should be short term deferrals to enable information to be provided later for a more considered decision.

The Regulator plans to issue further guidance for DB trustees on issues such as investments and liquidity in the coming weeks.

PPF reminds trustees of need to be prepared for all eventualities

Alongside the Regulator’s guidance, the Pension Protection Fund (PPF) has reminded trustees of the need to ensure that they are prepared and have suitable contingency plans in place should their scheme’s sponsor become insolvent. The PPF is directing trustees to its guidance on ‘Contingency planning for employer insolvency’, which highlights the need for trustees to plan ahead to ensure as smooth a transition as possible for scheme members should the scheme need to enter the PPF. Not only will this help the trustees and the PPF should it come to this, it will also help to make the transition into the PPF more efficient and minimise anxiety and stress for members by reducing uncertainty and delays.

The steps that trustees are urged to take include:

• ensuring that all scheme deeds, documents and data are accessible even if the sponsor’s business premises and systems cannot be accessed
• setting up a shadow payroll to ensure that pensions can continue to be paid in the event that the sponsor’s payroll function is no longer operational, and
• reviewing steps to realise charges and contingent assets on employer insolvency.

We’re here to help

If you have immediate concerns about your scheme or sponsor please contact us.

Follow the latest news on the impact of COVID-19 on pension schemes and sponsors on our UK pensions blog. For updates on the wider impact check out HSF’s COVID-19 hub.

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