Pension scheme trustees considering requests by employers to delay contributions into defined benefit (DB) schemes need more stringent plans for how contributions will be ‘switched on’ again, according to Lane Clark & Peacock (LCP).
Guidance provide to trustees by The Pensions Regulator (TPR) over the course of the coronavirus pandemic has stressed the importance of serious consideration to the mechanism through which shortfall will be recovered.
LCP partner Steven Taylor said the solution for trustees is "unlikely to be simple" and cannot wait until the schemes' next valuation without a detailed recovery plan mapping all missing contributions.
"Most trustee boards will be sympathetic to a sponsor in difficulty who comes to them with a request to defer contributions," he said. "But they also have a duty to think hard about how contributions will be ‘switched on' in future, and in particular about how they make sure that the pension fund is treated fairly if and when the position of the corporate improves."
Speaking to Professional Pensions last month, TPR executive director for regulatory policy, analysis and advice David Fairs said DB schemes had faired better than expected throughout the pandemic thus far, and the overall goal for the regulator was to see schemes being treated equitably compared to other parties.
He added there was no expectation contributions would cease to pension schemes but would look to trustees to ensure their scheme continued to be informed about sponsors' financial pressures ahead of time.
One idea within TPR's Covid-19 guidance for equitable treatment is the putting in place of ‘triggers' so that the missed contributions get reinstated as the company's position improves.
Taylor said: "This could include a requirement to pay contributions when free cash flow reaches a certain level or when the company is in a position to start making payments to other creditors.
He added similar ideas floated in the regulator's most recent annual funding statement could also form part of ‘business as usual' for all schemes, but are "particularly relevant where trustees are in the middle of deciding how to handle a request for deferral."
Taylor concluded: "Contingent contribution arrangements that enable the scheme to get a fair share of the upside in company finances will need to be carefully designed but can help improve the long-term security of the scheme."
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