COVID-19: Pensions Regulator guidance
In March 2020 the Pensions Regulator issued new guidance to employers and trustees setting out various regulatory easements which generally remained in place until 30 June 2020,.
The guidance acknowledges that sponsoring employers may be unable, in the short term, to pay contributions and may seek to reduce or suspend contributions as part of efforts to reduce costs and preserve the business as a going concern. It makes clear that any reduction or suspension of contributions should be “limited to the shortest period possible” and generally last no more than 3 months.
The guidance stresses that, when dealing with such requests, trustees must ensure that (i) they are provided with sufficient information to justify the request (including relevant financial information); (ii) other key stakeholders, including banks/funders and shareholders, are ‘sharing the pain’ (which may require written agreement to prohibit for example new dividends and fresh security being granted during the period of suspension); (iii) any suspension has a specified end date and objective triggers to restart contributions when trading returns to normal (or at least the “new normal”). It also stresses the Regulator’s expectation that, as trustees will now have a better understanding of the employer’s financial position, due diligence should be be undertaken before agreeing to extend any suspension arrangements and to resist this becoming the new normal.
Employers are expected to provide trustees with “full and ongoing” information in support of any agreement to defer contributions and the Regulator’s expectation is that suspended or reduced contributions should be repaid within the current recovery plan period unless trustees are confident that they have sufficient covenant visibility beyond that period.
The guidance recognises that some thought will need to be given to the most appropriate method of achieving any reduction/suspension (whether by formal amendment of the Schedule of Contributions or agreement outside this) and also cautions that advice should be taken in order to avoid unintended consequences associated with any suspension or reduction, such as unpaid contributions inadvertently triggering scheme wind-up by operation of the pension scheme’s rules.
Comment: The concessions set out in the guidance are appropriate at a time when many employers are reeling from the impact of COVID-19. However, employers should be prepared to present a robust business case in support of any request to reduce or suspend contributions and should expect such agreements to come with ‘strings’ ie to be underwritten by appropriate commitments to ensure equitable treatment for the pension scheme.