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Freshfields Risk & Compliance

| 1 minute read

COVID-19 – the impact on UK pension scheme funding and potential actions which employers and trustees can take

The coronavirus (COVID-19) pandemic is placing companies under huge pressure, with many employees being furloughed or in some cases made redundant. 

UK defined-benefit (DB) pension schemes are also under pressure, as their funding commitments represent significant demands on cash that many companies cannot meet at present. 

Investment volatility has led to a sharp increase in deficits, at the same time as many scheme sponsors have come under severe financial pressure. 

However, the pension scheme funding system does not easily adapt to a crisis of this speed and depth.

It is therefore welcome that the Pensions Regulator (TPR) has issued a series of announcements that recognise the potential impact of the COVID-19 pandemic on the funding, investment and covenant position of DB schemes. 

The announcements contain new easements (initially for the period until 30 June 2020) which are intended to provide trustees and sponsors with additional flexibility on DB scheme funding.

These measures potentially include (among other things) suspending or reducing deficit repair contributions (DRCs), suspending or reducing future service contributions (likely to be difficult to achieve in practice) and not taking enforcement action where sponsors and trustees need more time to conclude existing valuations. 

However, TPR has emphasised that requests to release security will be very challenging and difficult to agree.

Trustees will need to consider any relevant requests from sponsors in accordance with their fiduciary duties. 

However, provided trustees are being treated equitably compared to other creditors and are provided with suitable mitigation (if appropriate), we would expect most trustees to grant the sponsor additional flexibility in the circumstances.

Whatever course of action is chosen, TPR recommends that sponsors and trustees should carefully document their decisions. This will help sponsors to manage the risk of any future regulatory action.

For further details of TPR’s announcements and the courses open to employers and trustees, see briefing below: 'COVID-19 – the impact on pension scheme funding and potential actions which employers and trustees can take'.

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europe, pensions