Pensions - Articles - Key issues for trustees and sponsors arising from COVID19

The Coronavirus COVID-19 outbreak is affecting workforces all across the UK and the world. The spread of the virus has had a substantial impact on financial markets and the productivity of companies and workforces. As a result, trustees and sponsoring employers of occupational pension schemes should consider the potential key issues:

 1. Requests to reduce, delay or suspend contributions

 There may be circumstances where employers sponsoring a defined benefit pension scheme would seek to deviate from the agreed schedule of contributions as a response to cashflow concerns arising from the outbreak. The consideration of any such proposal would, from a trustee perspective, focus on what is in the best interests of the pension scheme, which will usually include making an allowance for themaintenance of an ongoing sponsor who can continue to support the scheme. Any proposal to alter an agreed schedule of contributions would, as a minimum, require the agreement of the scheme trustees, and the rules of the scheme should also be checked, as these could add additional conditions and provisos above the statutory requirements. If contributions are suspended,trustees will have to make sure that the pension scheme’s cashflows are reviewed to ensure that there is adequate cash for pensions to be paid, and expenses met in the usual way. The Pensions Regulator has issued a statement which reinforces the need for trustees to have monitoring and contingency plans in place, and confirms that it will continue to monitor the situation. It has also provided guidance for trustees where the sponsoring employer is in distress.

 2. Changing the date of actuarial valuations and taking account of post-valuation experience

 The current market turmoil could lead both trustees and employers to conclude that it is an inappropriate time to set the effective date of or conclude an actuarial valuation, which is effectively a snapshot of the funding position of a scheme on a given date.

 However, where there is scope within the time limits of the three-yearly valuation cycle and the 15 months in which a valuation must be submitted to the Pensions Regulator, the trustees and the scheme sponsor may think it would be preferable to use a date which falls outside of the acute circumstances currently being experienced when seeking toset longer-term funding objectives. If your valuation cycle means that you are currently working on a valuation with a 2020 effective date, we suggest you seek the scheme actuary’s views in relation to the impact of the current situation and what may be possible in terms of using an alternative date.

 Alternatively, trustees and employers will be aware that, in determining any additional funding required by a scheme arising from the actuarial valuation, it is within the actuary’s scope to take account of post-valuation date experience. It may be useful to discuss with the scheme actuary the possibility of adopting this course of action.

 3. Covenant reviews and distress scenarios

 The Pensions Regulator expects trustees to consider the covenant of the sponsoringemployers when an actuarial valuation is being undertaken and when there aresignificant sponsor or scheme events which may have an impact on the covenant. Trustees who are receiving current advice will need to consider whether the current circumstances are sufficiently exceptional to require an “out of cycle” review, and whether the current circumstances would disproportionately affect a covenant review (where the sponsor’s covenant will be relied upon in the long-term), or could result in a material and more longer lasting effect on the covenant. If the covenant situation was already a cause for concern prior to the current circumstances, trustees and employers may wish to consider whether there is an increased likelihood of distress scenarios arising andseek to take advice and engage with each other to explore solutions.

 4. Triggers for financial support

 The worsening market situation could detrimentally affect a scheme’s funding position such that a trigger for financial support, such as a funding ratio orcompany rating or other requirement, could be activated. Sponsors and trustees will need to consider whether such triggers could be met due to purely external factors and may need to update or amend relevant financial support accordingly.

 5. Communications to members

 Members of both defined contribution and defined benefit schemes may be concerned about the impact that the current financial uncertainty could have on their pensions. Defined benefit scheme members may be concerned about the employer’s ability to support the scheme and the risk of the deficit in the scheme increasing, both reducing the likelihood of their benefits being paid in full. This may result in a spike in transfer requests, which may not be in the members’ best long-term interests, and may also expose them to pension scam risks. For defined contribution schemes, members (especially those close to retirement) will be concerned that the fall in the markets will almost certainly have depressed the value of their funds and appropriateness oflifestyle design,and they may seek to transfer or, where possible, seek to “cash out” their benefits, either by utilising the pensions freedoms (where they are eligible to do so) or by other methods, which again may expose them to the risk of pensions scammers. Active members may also be concerned about the impact that changing work patterns could have on their benefits. Trustees and employers may wish to pre-empt member concerns by issuing a communication highlighting the key aspects of their approach tomaintaining business as usual during the outbreak and warning of the risks of pension scams and hasty transfer decisions.

 Consideration should also be given to bespoke communications for certain highly-impacted groups (such as those within a year of retirement).

 6. Insurance

 Trustees should consider whether their insurance policies, in particular life assurance, have any exclusions for pandemics or similar force majeure type clauses which could limit the insurer’s obligation to pay out. If so, an employer could potentially be “self-insuring” benefits over a certain threshold

 7. Investment strategy and potential lockdown of investments

 Trustees should consider whether the current circumstances mandate a review of the scheme’s investment strategy. For both defined benefit and defined contribution schemes, there may be a limited ability to exit certain investments in times of market uncertainty and this may be something that trustees first want to check with their investment consultants.
 8. Administrative slowdown, including processing of CETV requests

 There could be a capacity crunch at administrators, in-house pensions function or other scheme service providers affecting their ability to respond to member requests. In particular, the threemonth guarantee period for a CETV is a hard legislative deadline and trustees could be exposed to a maladministration claim if a request was not processed within this time period. Trustees should liaise with their service providers to understand their contingency arrangements.

 9. PPF Contingent Assets

 The current circumstances mean that trustees who need to put in place or re-certify a PPF-compliant contingent asset should ensure that they leave ample time to complete all the steps. The PPF has indicated that it may be amenable to some delay in submission of documents but it has said that it cannot formally approve any extensions in advance, so schemes should not be relying on an easement.

 10. Transactions and trustee meeting requirements

 When the coronavirus situation occurred, many schemes will have been in the process of finalising time-critical documents (such as deeds of amendment or bulk purchase annuity transactions). Advice may be neededin relation to remote execution and witnessing of documents. March and April are also traditionally a busy time for trustee meetings. Whilst many in-person meetings are now being held virtually online, you may encounter situations where trustees are unable to attend even these due to illness or self-isolation. As a result, you should ensure that you are familiar with the provisions in relation to quorum, delegation, chair and holding trustee meetings in your scheme rules/trustee company articles.

 11. Data Protection and Confidentiality

 Trustees should consider how they are going to protect confidential information and be GDPRcompliant in circumstances where they are likely to be performing their trustee duties from home, in particular use of personal emails/data storage and protection of any printed documents. Trustees may also wish to revisit their service providers’ GDPR and wider confidentiality obligations to ensure they have appropriate obligations as their workforce are likely to be processing data from home for a considerable period. 

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