The Pensions Regulator has issued guidance to trustees of DB schemes setting out what it expects from them as the “first line of defence” for members where employers are in financial difficulty. Early in the Covid-19 pandemic, the Regulator took a pragmatic stance and introduced various regulatory easements; the focus is now on making sure trustees don’t lose out to other stakeholders.

The new guidance expects trustees to identify and manage risks early on, involving more frequent and detailed covenant monitoring with legally enforceable information sharing protocols. The aim is to protect pension schemes from the effects of lender actions which may extract value from distressed sponsors to the detriment of the scheme.

The Regulator’s concerns about the impact of the Covid-19 pandemic on the financial health of sponsoring employers have led it set out in detail the type of information it expects trustees to be receiving and considering on a regular basis, and to spell out that the options available to protect pension scheme members’ benefits decrease as the sponsor becomes more distressed. Trustees are encouraged to take more advice, which may need to be more specialised and detailed, and more often. The Regulator specifically refers to this being necessary even though it may be counterintuitive to spend money on advice when the employer is struggling.

As well as receiving information about cash flows and forecasts, trustees are expected to consider banking covenant tests and the timing of debt maturities and to build the potential outcomes into their risk management with contingency plans. They should consider triggers, such as changes in share price or the level of order books, and what steps they would take, such as changing their investment strategy to minimise risk as a result.

Comment: This is another step in the Regulator’s desired direction of ensuring companies give enough weight to the position of the pension scheme. The list of information trustees should be reviewing is wider than many employers will be used to providing and there is a particular focus on steps lenders may take when a company is beginning to have financial difficulties. Employers with DB schemes should be prepared for more discussions with trustees about their financial position and for trustees to take action more quickly than in the past. Waiting for the next triennial valuation before making changes is likely to be a thing of the past.