The calm before the storm?

At the start of the pandemic, TPR was quick off the mark to publish funding and investment guidance for trustees. It subsequently updated this in June, to reflect its view of the impact of the ongoing crisis on pension schemes and to provide further detail on how it was continuing to support schemes in these challenging times.

On 5 August, TPR followed up its guidance with a blog explaining what DB trustees “can expect from the regulator and how to prepare as the economic impact of the coronavirus continues to hit schemes and sponsoring employers”. At that time, TPR had received 108 revised recovery plans. Of these, almost 86% involved an agreement to defer deficit repair contributions (“DRCs”). The majority were from small schemes and sectors under increased strain such as the manufacturing, retail and airline industries. TPR “expects more COVID-linked insolvencies in the autumn and during 2021 and more companies to be looking at restructuring”.

Trustees “should be open to reasonable requests from an employer in distress but must make an informed decision if it’s in members’ best interests to agree”. Appropriate mitigation (such as the employer ceasing distributions and possible security) should also be sought.

In restructuring situations, TPR’s supervision teams “will expect trustees to have a robust plan, which may include bolstering the expertise of the trustee board and seeking professional advice”. Trustees may need to look beyond their usual advisers and not just to their covenant advisers, as understanding their scheme’s position and options during restructuring and insolvency will be key. They should keep on top of potential conflicts and maintain clear records of their decisions.

What might be coming next – and what should trustees do?

To date, our experience of the fallout from the pandemic has broadly mirrored TPR’s statistics. We have not seen an avalanche of sponsoring employer insolvencies or DRC deferral requests. This points towards the apparent success of the CJRS and other steps taken by government to mitigate the impact of the pandemic. However, in the absence of further state intervention, our expectation is that this period of relative calm is unlikely to continue.

Recognising this, we understand that TPR will shortly be writing to the trustees of all DB schemes to reiterate warnings that they should be alert for signs of employer distress (such as profit warnings, credit downgrades or debt refinancing) to prevent scheme members getting a raw deal from hastily arranged business rescues.

As sponsoring employers come under more strain as a result of the ongoing pandemic, our view is that trustees could find themselves under mounting pressure from employers to accept contributions that are insufficient to keep funding levels from sliding backwards.

Given the speed at which distressed employer scenarios can unfold, it is important that trustees take steps to prepare now. As a first step, they should ensure they understand their rights, powers and obligations as trustees. Early engagement with the employer is also key (don’t wait until things go wrong)!

Trustees should have processes in place (including lining up relevant advisers) to monitor the strength of their sponsoring employer’s business and that they have access to all relevant employer information, such as cash flow analysis, details of loan facilities and management accounts.

Where possible, trustees should also work with their sponsoring employers to agree a mechanism by which the employer will notify them of potentially material financial events (such as the issuance of new debt, repayment of debt, changes to lending terms, granting of legal charges or other security, as well as any planned business acquisitions or disposals).

Taking these steps now should ensure that, in the event of a distressed employer scenario, trustees are well placed to secure equitable treatment for their scheme and that they have a seat at the table to influence creditor discussions.

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