NEWS   |    November 9, 2020

Unprecedented times lead to unprecedented measures

Unprecedented times lead to unprecedented measures, but these will not continue unchecked.

Despite the financial assistance on offer in the short-term, caution is necessary about how companies behave during the pandemic with a view to the long-term. Nowhere is this more pertinent than in the sphere of company pension schemes.

In its Annual Funding Statement, published in April, The Pensions Regulator (‘the Regulator’) recognised that employers are under considerable pressure. Trustees of the UK’s 5,500 defined benefit pension plans are encouraged by the Regulator to be supportive of employers, many of which are manifestly facing significant financial pressures and potentially struggling to meet their pension contribution requirements because of the pandemic. The continued existence of a strong employer is obviously important for trustees, who rely on the financial support of their employer to fund the scheme.

The continued ability of employers to pay contributions to schemes is the most obvious risk that needs to be managed and monitored by trustees. The Regulator relaxed its requirements so that late payment or missed contributions did not need to be notified to it as quickly as normal, although this concession is coming to an end. It accepts that trustees may agree to a short-term suspension of employer contributions; however, the Regulator expects trustees to keep any suspension to as short a period as possible, to make sure they are fully informed about the financial position of their employer on an ongoing basis and to ensure they are being treated equitably with other stakeholders in the employer business. Although many initial suspensions have come to an end, the continued uncertainty for many employer businesses means that these agreements are often being revisited and employers may make requests for further extensions based on updated financial information.

In this context, pension scheme trustees are urged to remain ‘vigilant’. The Regulator particularly highlighted shareholders’ dividends as the most obvious cause of concern, while also cautioning against ‘excessive executive remuneration’, typically in the form of large bonuses. The Regulator expects trustees who agree to suspend payments into the pension scheme to get a legally enforceable agreement that dividends and returns of capital will not be made before those missed contributions have been repaid.

The relaxation of the rules was, no doubt, welcome relief to some, but it might also have created a false sense of security in terms of future obligations. Trustees and employers need to remember that, rather like the furlough subsidy to employers, delays in the payment of deficit contributions and the Regulator’s enforcement activities are only temporary.

Of course, it is acceptable to take unprecedented steps to deal with this unprecedented crisis, but employers should not expect those to continue indefinitely. As ever, trustees will need to make sure that they are being treated equitably and that scheme members are not losing out to shareholders or other creditors.

As with the unexpectedly high level of uptake in the furlough scheme, the Regulator may have been surprised by just how many employers have taken advantage of their position by suspending contributions. In response, the Regulator has put down a marker that scheme funding cannot and should not be ignored. As a result, employers and trustees should not take the relaxations for granted.

Guidance on defined benefit scheme funding

The following is derived from guidance on defined benefit scheme funding published on the Regulator’s website, supplementing its Annual Funding Statement.

It is important that employers provide trustees with the information they need (or at least whatever can reasonably be provided) in a timely manner. Employers are expected to keep trustees informed of any discussions with other stakeholders, such as banks and other lenders, which may impact on the position of the scheme.

The Regulator will be 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:

• the need for this can be justified
• a plan is made for deferred scheme payments to be caught up (typically within the existing recovery period timetable)
• a plan is agreed for mitigating any detriment caused to the scheme
• the scheme is being treated equitably compared with other stakeholders: in particular, the Regulator would first expect payments to shareholders (as well as other forms of value leaving the employer) to have stopped.

The Regulator strongly recommends that employers and trustees document their position regarding the treatment of their schemes, particularly as this may assist in any future engagement with the Regulator.

Read Vikki’s article in Professional in Payroll, Pensions and Reward.

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.

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