The Pensions Regulator (TPR) is “pulling out all the stops” to help struggling employers during the Covid-19 crisis, although latest guidance may put trustees in a “challenging” position, the industry says.
The watchdog issued guidance on Friday (27 March) telling trustees to be open to employer requests to suspend or reduce deficit recovery contributions (DRCs) for up to three months as scheme sponsors battle the economic downturn arising from the pandemic.
The update also included an allowance for late submissions of recovery plans, pre-crisis assumptions for ongoing valuations, and suspensions of transfer activity. It followed initial guidance on 20 March.
PwC pensions partner Paul Kitson said the fast pace of change was a "sign of the times".
"It feels like TPR is pulling out all the stops to enable trustees to support sponsors through the next few months, although trustees still need to carefully consider any request to defer contributions," he said.
"In a number of cases, trustees may need to work with their advisers and sponsor to agree deferral periods longer than three months."
He added that schemes will also need further advice to ensure any deferral does not cause unintended consequences, such as triggering wind-up, or s75 debts in a multi-employer scheme.
"While this clarification from TPR will be welcome relief for many sponsors seeking to manage cash in the short term, it is not a free lunch," he continued. "Deferring sponsor contributions will likely make the pension scheme cashflow negative. This may mean that the pension scheme has to sell assets to pay pensions while the market is depressed.
"Trustees and sponsors will have to carefully balance the need for retaining cash in the sponsor against the impact on the pension scheme."
Hymans Robertson issued similar warnings. Head of defined benefit pensions Susan McIlovgue said: "Trustees need to consider the hidden implications of suspending contributions. Many schemes are carefully managing the risk of being cashflow negative and suspending contributions will heighten the risk of becoming forced sellers of assets at depressed prices.
"Some schemes will need more, rather than less, cash due to the Covid-19 impact, including extra collateral calls and extra benefit payments if more members look to draw benefits early or take transfer values. Schemes could be faced with a perfect storm of less cash coming into the scheme, more cash going out of the scheme, plus a deterioration in funding levels and sponsor covenant strength."
But Lane Clark & Peacock added that trustees will be put in a "challenging position" as the law has not changed and they must consider working for the best interests of members.
Partner Jonathan Camfield said: "Because of this, TPR is keen to stress all the hoops that it expects trustees to go through before agreeing to these concessions. This includes ensuring that there is a legally-binding commitment not to pay dividends during any suspension of DRCs. And, on top of that, the trustees still have their general duties to do the best thing for members - and generally that won't be deferring contributions other than in the more extreme cases where a business' survival is in question.
"So, while this latest concession is to be very much welcomed and is likely to help some companies survive during the next three months, neither employers nor trustees should underestimate the work needed to ensure (and evidence) that it is appropriate to make use of the concession.
"Trustees are in a challenging position as they seek to respond positively to the latest official guidance while honouring both the law of the land and the rules of their scheme."
