As of 12 November 2020 the Pensions Regulator (tPR) declared that pension trustees for specifically defined benefit (DB) pension schemes must be ready for possible sponsor distress following the effects of the Coronavirus pandemic.
Trustees should be ready and cautious for indications of employer distress or insolvency which consequently could be detrimental for the supported scheme and its retiring members.
Trustees have always been the frontline of defence for their pension scheme, however with the pandemic showing no easy escape and Brexit bells still ringing, it is key for them to continue being as vigilant as ever by monitoring their employer’s wellbeing. TPR is urging trustees to prepare now for the difficulties their sponsoring employer may be faced with, now and in the future, to reduce the impact on its members.
What Can Trustees Do?
TPR have released strategic guidance for trustees of DB schemes. These are the key areas trustees should be taking action on:
- Adoption of a fully documented integrated risk management approach to the Scheme
- Contingency plans with suitable triggers
- Regular review of integrated risk management and governance procedures
- Regular engagement with the employer and creditors to mitigate, identify and manage risks early
- Monitoring of employer trading with subsequent discussions with the employer to ensure the protection of the scheme’s members
- Stay alert to pension scams and communicate with members by offering support if they face uncertainty
- Covenant monitoring and reviews
- Reviews of investment strategy in distressing scenarios
Failure and delay of implementing these key protection steps may provide stakeholders crucial control over the employer, potentially to the loss of the scheme.
The guidance outlines that trustees should ensure the employer provides access to relevant and time specific business and financial information.
How to Identify Sponsor Distress
It is key to be aware of your sponsor’s industry, however signs of financial distress may include:
- Cash flow constraints
- Credit downgrades
- Removal of trade credit insurance
- Disposal of profitable business units
- Loss of key customer contacts
Even at the best of times, situations regarding employer going concerns and stability are complex and often time-pressured if they are deemed conflicting and damaging to the scheme. Where required, appropriate professional advice should be considered when needing clarification on managing distress or insolvency
If trustees cannot agree steps of action their sponsor, tPR is offering support, and will perform risk assessments and intervene where appropriate.
Subscribe to our newsletter here to receive monthly industry insights to your mailbox.