COVID-19: further guidance issued on UK pension scheme funding

The Pensions Regulator (TPR) recently updated its guidance designed to help pension scheme trustees and employers of defined benefit pension schemes cope with the financial impact of COVID-19.

We recently issued the following briefings covering the following topics on pensions funding:

• the immediate impact of COVID-19 and steps which employers and trustees could take in the short term to change pension scheme funding commitments, covering TPR’s guidance dated March 2020;
• the medium to longer term implications of COVID-19 and the sharp increase in scheme deficits it has caused for valuations yet to come (PDF); and
• changes to the statutory funding regime being introduced by the Pension Schemes Bill currently before Parliament and TPR’s proposals for a new regulatory framework on its approach to scheme valuations and employer funding obligations (PDF).

In its latest guidance dated 16 June 2020, TPR made it clear that the information issued in March and April remains relevant, but trustees are asked to resume certain key reporting requirements. This will ensure TPR is able to horizon-scan effectively, identify risks and act as necessary to protect members. 

TPR particularly expects trustees’ reports to include the following details: 

• suspended or reduced contributions – TPR will expect a revised deficit recovery plan or a report of missed contributions;
• late completion of valuations and failures to agree recovery plans; and
• delays in providing members with cash equivalent transfer value quotations and in making transfer payments.

There is also further guidance for trustees facing employer requests to agree to suspend or reduce deficit repair contributions. TPR continues to say that trustees should be open to such requests, but should subject them to appropriate due diligence (particularly since TPR expects greater insight into an employer's short-term liquidity to have developed since the COVID-19 pandemic began).

Throughout its COVID-19 guidance, TPR has emphasised the importance of trustees and employers working together to manage the impact of COVID-19 on both businesses and pension schemes in both the immediate and long term. 

One area of focus in particular has been on scheme funding positions. Some of the key points from TPR’s guidance over the past three months are set out below as ‘Considerations for employers’ and ‘Considerations for trustees’.

Considerations for employers 

TPR recognises that, in response to the challenging circumstances created by the pandemic, many businesses are (or will be) seeking to engage with banks and other lenders in previously unforeseen ways to improve liquidity levels. Any such agreements – particularly in relation to the grant of security and other financial support to lenders – may then have an impact on the position of schemes. TPR therefore asks that trustees are kept informed of any discussions with such stakeholders in order to facilitate appropriate decision-making in relation to any scheme detriment and to ensure that the scheme is not being unfairly prejudiced as compared to other stakeholders.

TPR has indicated that it will be pragmatic and reasonable in scenarios where trustees are being asked to agree to a previously unforeseen arrangement (such as reductions or suspensions in deficit repair contributions, or additional debt being secured over employer assets), provided that:

• the need for this can be justified;
• a plan is made for any deferred scheme payments to be caught up in the long term; and
• a plan is agreed for mitigating any detriment caused to the scheme (this may include, for example, the scheme having equal access to security as other lenders and stakeholders).

Considerations for trustees

Recent TPR guidance has also considered defined benefit scheme funding in light of COVID-19 from a trustee perspective, in particular focusing on the management of three broad areas of risk:

• the ability of the employer to support the scheme; 
• investment risks; and
• the scheme's funding plans.

Covenant impact

Given recent events, TPR expects trustees to enhance reviews of employer covenant strength to understand the potential impact of COVID-19. Where the monitoring identifies adverse changes in the covenant, trustees are expected to have contingency plans in place (drawn up in conjunction with the employer) so they can react appropriately to certain key areas of risk. For example, additional cash contributions could be paid if the scheme’s funding level deteriorates more than a specified level. TPR may ask trustees to demonstrate that such interactions with the employer have taken place.

As noted, certain employers and trustees may be in the process of discussing possible requests to suspend or reduce deficit repair contributions and/or future service payments as a result of current conditions. However, if there is good evidence that the covenant has materially worsened and is not expected to recover in a reasonably short timeframe, trustees are encouraged to consider whether it would be in the best interests of members to update the scheme’s funding arrangements (eg calling a new actuarial valuation and/or revising the recovery plan) to more accurately reflect the sponsoring employer’s position in exchange for agreeing to such requests.

Scheme investments

Due to the risks for schemes in terms of the uncertainty around economic outlook, investment returns and the longer-term prospects of employer’s, TPR also encourages trustees to review the impact on their scheme’s investments and be ready to undertake a further review if the situation further changes.

Long-term funding targets

In the current context, schemes with long-term funding targets (LTFTs) in place already should be able to continue as normal with suitable short-term modifications. TPR encourages schemes to set a LTFT consistent with how the trustees and employers expect to deliver the scheme’s benefits, and then be prepared to evidence that their shorter-term investment and funding strategies are aligned with this. 

The government’s policy intent, as set out in the Pension Schemes Bill, is to introduce a legal requirement for schemes to have such long-term strategies.

Contact us

Please get in touch with your usual Freshfields contact or the contacts listed if you would like to discuss any of these points further.