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DB pensions and COVID-19: managing cashflow constraints

Paul Brice Paul Brice

Among business stakeholders, many defined benefit (DB) pension schemes have been particularly affected by the COVID-19 outbreak.

With the potential for increased liabilities and reduced investment values, coupled with affordability and cash flow constraints, Paul Brice offers eight steps that sponsors of DB pension schemes should consider in their discussions with scheme trustees.

The DB pension scheme stakeholders

Clearly sponsors will be working to manage their businesses through turbulent times, while trustees will be looking to support and maintain the viability of the covenant supporting their scheme, and may be concerned that other stakeholders could be strengthening their positions at the expense of the scheme. 

The Pensions Regulator: reasonable, pragmatic and proportionate

The Pensions Regulator (TPR) has issued guidance specifically relating to the current environment, which it will continue to update as the situation evolves. The guidance provides clear signposts as to what they regard to be important for both sponsors and trustees. This gives assurance that TPR will take a reasonable, pragmatic, and proportionate approach to regulation given the current challenging climate.  

TPR recognise that it may be necessary for sponsors to request that changes are made to the current funding arrangements, such as a temporary suspension of deficit reduction contribution (DRC) payments, and that trustees should be open to such requests. They do, however, make it clear that any requests should be considered carefully by trustees to ensure the equitable treatment of the pension scheme. Where a sponsor requests to cease DRC payments temporarily, TPR would expect:

  • justification for the need to cease DRC payments
  • regular information to be provided that allowed trustees to assess covenant impact and DRC affordability
  • suspension of dividends and any other form of shareholder return
  • a plan to repay the suspended contributions, ideally within the current recovery period
  • protection to mitigate any detriment to the scheme, if available.

If limited information is made available to trustees, TPR suggest that they agree to a maximum suspension period of three months. For longer periods to be considered, they would want the sponsor to provide full and ongoing information, and to have the commitment of other creditors to also support the business over longer periods.

Eight sponsor steps for consideration

The flexibility being offered by TPR will no doubt be welcomed by many scheme sponsors who are faced with extra-ordinary pressure on their cash flow and other financial commitments. We believe that the following eight steps should help scheme sponsors to make the most of the support that is available to them and should be considered alongside the guidance from TPR and legal and other advice:

Where appropriate, be ready to provide visibility on your position to the trustees, possibly including some rudimentary stress testing to help them understand the outlook

Be ready to explain to the trustees how other stakeholders are reacting – such as lenders with covenants, key suppliers, the government and employees

If the scheme is significant, take stock of your options with your full advisory team including, where appropriate, actuarial, investment, covenant and legal advice

Be clear as to the nature of and rationale behind any ‘ask’ of the scheme, and whether mitigation can be provided and why or why not

Ensure any ‘ask’ sets out how any deferral or rescheduling of contributions, for example, will be addressed once the current circumstances return to normal.

The trustees are likely to want to know that any ‘asks’ of the scheme are equitable from the standpoint of all key stakeholders and proportionate to the potential impact of the current circumstances.

Anticipate the possible intervention of TPR, particularly where material requests are being made of the pension scheme.

Try to help trustees have the necessary time and information to make an informed decision and recognise the guidance from TPR around the duration of any accommodations where information is limited

To discuss any of the above, or how current developments are impacting on schemes, contact Paul Brice.

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