Covid-19 and corporate distress: what employers and trustees need to know
Mitigating the spread of Covid-19 continues to dominate business and personal life throughout the world: many borders and businesses remain shut as various countries take the first tentative steps to emerge from the constraints of a crippling lockdown that has frozen large swathes of commercial activity. The cost of actions taken to keep the economy on ice will create a difficult legacy for everyone to manage.
It is impossible to predict just how much, or for how long, the economic shocks created by the pandemic will reverberate, although there is a consensus among economists that a global recession has already begun. There will be an adverse effect on the immediate and longer-term solvency of employers, on the current and future demand for their products and services, as well as on the availability of their staff. Both employers and trustees will need to be prepared for the effects that this will have on pension schemes, both now and in the future.
The Pensions Regulator (TPR) is trying to help those involved in running occupational pension schemes. It is taking ‘a reasonable, pragmatic and proportionate approach’ to regulatory work in terms of reporting and enforcement. In practice, this means that TPR is being more flexible in what they expect businesses to report in a number of areas, and when they expect them to do so. For now, these easements will remain in place until 30th June 2020. But should significant elements of lockdown still remain in place by then, this date may be extended.
Enforcement has also been relaxed, temporarily, under TPR’s more flexible approach, by suspending its regulatory initiatives, granting longer periods for compliance, relaxing its enforcement regulations and taking a risk-based approach to enforcement instead.
Trustees and employers are still fully bound by their statutory duties and the rules of their scheme(s) but can expect more flexibility from TPR. For example, the deadline for the reporting of late payment of employer contributions to their schemes has been extended from 90 to 150 days.
Trustees who are in doubt of how the changes introduced by TPR may affect their duties and obligations should seek legal and actuarial advice in order to navigate any confusion that arises within the current landscape and ensure they deal with any employer request to suspend DB contributions, or pay DC contributions late, properly.
As at 23 April, TPR reports that 1 in 10 DB scheme employers has applied to suspend deficit repair contributions; some surveys predict up to 50% of employers will do this during the course of the pandemic. TPR has told trustees to remain open to such requests to reduce or suspend contributions but expects, they should establish that the action is actually needed and that their support is part of a co-ordinated and fair response across key stakeholders.
There is an expectation that the scheme will be treated equitably compared to banks, lenders, suppliers and other creditors – and that there should be no payments to shareholders. Any relaxation of contributions should be for as short a period as possible and initially probably no more than 3 months, to allow trustees to collect enough information to make a long-term decision on the future of the employer and the implications for the scheme’s recovery plan.
Trustees ought to take legal and actuarial advice on this. Suspensions or reductions beyond 3 months are possible where required and TPR will no longer take action on late or non-payment of contributions during this 3 month period. The Pension Protection Fund (PPF) has made clear that the levy to be collected this year was calculated based on pre Covid-19 figures and will therefore not be impacted by the pandemic. It has not yet formally granted any extensions to levy data deadlines. There is, however, guidance published on its website which advises that reasonable, Covid-19 related late submissions will be allowed and it states it is considering ways in which it can support employers in these unforeseen circumstances and will communicate any decisions before levy invoicing starts. Of course, employers cannot reprioritise PPF submissions entirely but should be alert for further news.
During this difficult period, as highlighted by TPR, effective and timely communication between employers and trustees is more vital than ever. This is of particular importance when detailing cashflow and future financing needs. As employers become aware of material changes in their cashflow position, including key payment dates within the next three months, they should automatically share this information with the trustees.
Employers should assess any restrictions that exist on their current borrowing together with any agreed facilities they have in place for future borrowing, and make trustees aware of them. Likewise, employers and trustees should also be aware of any imminent tests of their banking covenants and whether they are likely to be met.
The same pattern of awareness and communication should extend to the financial position of relevant third parties. This may include the solvency of key suppliers, creditors and lenders – all of which may affect the viability of the employer’s business. Equally, trustees and employers should also be aware of what support is available from the government. Employers are, for example, able to claim for the statutory minimum pension contributions under automatic enrolment, on the wages claimed under the Coronavirus Job Retention Scheme and if they do, must then pay the amount to the pension scheme For employers, it is also important that if payments are proposed between group companies to improve overall covenant strength, that these are discussed in advance with the trustees and be aware that TPR expects trustees to seek mitigation in this situation, even in the current crisis.
Because the Covid-19 crisis is both fluid and dynamic, TPR and PPF guidance is likely to evolve in the weeks and months ahead, and potentially be implemented with immediate effect. It is self-evident that trustees and employers will have to stay up to date with events so that they can act in accordance with changing guidelines over the challenging time that lies ahead.
Read Vikki and Danyal’s article in Business Matters.
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.