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DB scheme funding and investment: COVID-19 guidance for trustees

We appreciate this does not cover the whole range of issues trustees are facing. This guidance is designed to support trustees facing difficult decisions and circumstances, and should not supersede trustees’ fiduciary duties, their obligations under the scheme rules, or the legislation. We are not authorising, encouraging or compelling a particular course of action - we expect trustees to do the right thing for their situation and members. This document highlights some good practice ideas and outlines our current response to legislative breaches or trustee actions.

Our Annual Funding Statement also provides messages relevant to all DB schemes, but particularly schemes with valuation dates between 22 September 2019 and 21 September 2020 (Tranche 15, or T15 reviews), as well as schemes undergoing significant changes that require a review of their funding, investment and risk management strategies.

Published: 27 March 2020.

Key points

Schemes completing their valuations now

  • We do not expect trustees who are close to completing their valuations to revisit their valuation assumptions.
  • Trustees are not required to take into account post valuation experience, but we expect trustees to consider it when agreeing recovery plans, with a focus on whether provisionally agreed DRCs are still affordable for the employer.
  • If trustees need more time to consider the scheme’s and employer’s situation, they may decide to delay their recovery plan submission by up to three months, and in that case, although we cannot waive trustees’ statutory obligation, we will not take regulatory action in respect of a failure to submit.

Employers’ requests for easements

Requests to suspend or reduce deficit repair contributions (DRCs)

  • Trustees should be open to requests to reduce or suspend DRCs in line with the principles set out in our guidance published 20 March. Where sufficient information is not available to make a fully informed decision, trustees should, where appropriate, agree to requests to suspend or reduce DRCs for as limited a period as possible while appropriate information is being provided. Trustees will need to carefully consider any requests to suspend/reduce DRCs if they are expecting annual or substantial contributions (eg where a one-off, large, single payment is due or where DRCs are paid annually and the next one happens to fall in the suspension period).
  • This should not be longer than three months if the trustees are not able to fully assess the employer’s position as per our guidance A condition of this agreement should be full and ongoing provision of information so that trustees can monitor the employer covenant. The less confidence the trustees have that they will have access to timely, relevant information, the shorter the reduction or suspension period should be. Particular care should be taken by trustees where DRCs in the proposed suspension period are substantial.
  • In agreeing DRC waivers, trustees should ensure that banks and other funders are being supportive and that no dividends, or other distributions are being made from the employer.
  • We expect trustees to continue to offer only short-term concessions of no more than three months until such time that more reliable covenant visibility is available. However, extensions beyond this may be appropriate where other creditors commit to support for longer periods and restrictions on trustee extensions would limit that support.
  • Trustees may agree to a longer suspension/reduction period, but this should be fully considered in line with our 20 March guidance, ie with appropriate information on the business case for additional reduction/suspension of DRCs, and should ideally be underwritten by any available protections.
  • Trustees should take legal and actuarial advice not only on whether a suspension/reduction of DRCs is appropriate, but also on the most appropriate method to suspend/reduce DRCs (eg amendment of Schedule of Contributions (SOC) or short-term suspension of payments without amendment to the SOC). This is to avoid unintended consequences such as missed payments accidentally triggering scheme wind-up.
  • We ideally expect suspended/reduced contributions to be repaid within the current recovery plan timeframe and the recovery plan not to be lengthened unless there is sufficiently reliable covenant visibility (for example, if the existing recovery plan is short).
  • We cannot waive trustees’ statutory obligations, but we will not take regulatory action in respect of late reporting or a failure to make contributions during the three months.

Requests to suspend or reduce payments for future service

  • Requests to suspend or reduce future service contributions, for the employers and possibly members, should be treated in the same manner as requests to suspend or reduce DRCs. However, there are additional issues trustees should consider (such as whether this is allowable under scheme rules) and we recommend legal advice is taken.

Payments to related entities or shareholders

  • In agreeing to any reduction or suspension of DRCs, trustees should ensure that dividends and other forms of shareholder return are also suspended, and this should be underpinned by legally binding commitments.
  • In exceptional circumstances, it may be appropriate for employers to make extraordinary and essential intra-group payments to support the wider group liquidity and going-concern status. Here, trustees should (a) understand the intention behind the payment and the expectation and ability of the employer(s) to retrieve funds and (b) seek mitigations. Such payments should be assessed in the context of whether they are in the interests of the employer’s ongoing covenant strength.

Requests to release security

  • It is unlikely that a release of security is in the best interests of members. An employer’s request that trustees release security is likely to have significant legal and financial implications, compromising the security of members’ benefits. Trustees should take appropriate specialist advice and carefully consider such requests in full knowledge of the facts and implications. Trustees should contact us if they are concerned.

Advice and governance

  • Trustees should consider whether real time, specialist advice is required in the circumstances. It is important in these difficult times to continue to fully document their decisions, whether they seek advice or not.

Employers of DB schemes provision of information to trustees

  • We acknowledge the challenging circumstances faced by many employers. Nevertheless, it is important that employers provide trustees with the information they need (or, at least, whatever can reasonably be provided) in a timely manner and treat the scheme fairly compared to other stakeholders.

Investments

Trustees should do the following:

  • Review their scheme’s cashflow requirements and how they expect those obligations to be met. They should allow for issues such as additional ‘cash strain’ arising from increased member movement, potential reduction in or suspension of DRCs, lower levels of investment income and investment ‘cash calls’.
  • Review and manage specific risks which may now exist within their portfolios or within their sponsoring employer’s business, eg concentrations of risk and/or exposures to deteriorating sectors/credits .
  • Review any previously agreed investment and risk management decisions due to be implemented in the future. This is to ensure they remain appropriate, efficient and do not introduce risks or crystallise losses. 
  • Review their investment governance structures and delegations to ensure they can continue to function and make decisions in the event of trustee incapacity or absence.
  • Assess, following the recent performance of their scheme, whether they should make any changes to their investment and risk management governance framework.

Transfer values

  • Trustees should give greater attention to the heightened risk of members being targeted by scammers and unscrupulous financial advisers.
  • Trustees may decide to suspend cash equivalent transfer value (CETV) quotations and payments to give themselves time to review CETV terms and/or to assess the administrative impact of any increase in demand for CETV quotes.
  • This may mean a breach of disclosure requirements. We cannot waive an obligation to report the breach to us, but we won’t take regulatory action in the next three months against trustees who suspend CETV activity.
  • After three months, trustees may decide to continue with the CETV suspension or delayed quotation if this is still in the best interests of their members. However, they should be clear on the reasons to do so and they should notify us.

What you can expect from us

  • We will take a reasonable, pragmatic and proportionate approach to our regulation of schemes.
  • We will continue to reflect prevailing market conditions in our DB operational processes.
  • The regulatory easements in this announcement will be maintained until 30 June 2020, but we will review this date as matters progress.
  • The trustees of schemes in relationship-managed supervision should contact their named supervisors with any queries.
  • Trustees and employers of all other schemes should contact customersupport@tpr.gov.uk if they require assistance.

These are unprecedented times and the trustees and employers of DB schemes are facing significant and complex challenges across a range of issues relating to investments, funding and the employer covenant and associated affordability. We consider below some of the issues trustees and employers are likely to be grappling with at the moment.

Schemes completing their valuations now

Many trustees will be close to completing their actuarial valuation with an effective date late in 2018 or early in 2019. They will be looking to agree schedules of contributions and, where applicable, recovery plans based on those valuations.

For these schemes, valuation assumptions will have been set under very different conditions than those prevailing today, both in terms of financial markets and the employer covenant. We do not necessarily expect trustees to revisit these assumptions, although some trustees may be advised that it is in the best interests of their members to do so.

For many schemes, the current funding position, calculated using consistent assumptions as for the valuation, will be significantly worse and the deficit materially larger. We will not require trustees to allow for relevant experience since the effective date of the valuation in their recovery plan. However, we do expect trustees to consider post-valuation experience when agreeing the recovery plan in the context that the employer’s affordability may now be constrained.

Trustees may be asked by the employer to temporarily reduce or suspend DRCs compared to those they had been discussing throughout the valuation process. Guidance on how to deal with such requests is set out in the section below.

Some trustees may consider it is in the best interest of their members to take more time to consider the scheme and employer’s current situation rather than submit a valuation and associated documents which may need to be re-negotiated soon. In these circumstances, it might be appropriate for trustees to delay submitting their valuation by a short period of up to three months. This may mean that the trustees fail to meet the 15 months statutory deadline for completing and submitting their valuation to us. For such schemes, we cannot waive trustees’ statutory obligations but we do not intend to use our powers to fine the trustees for late submission. We will review our position in three months’ time when we hope to know more about how the COVID-19 pandemic has impacted UK businesses and pension schemes.

If trustees are ready to complete their valuation now and they think it is in the best interest of their members to do so, they should submit it to us.

Employers’ requests for easements

In our update for trustees, employers and administrators published on 20 March 2020, we recognised the unprecedented, challenging and uncertain times for trustees, employers, administrators and, crucially, savers because of COVID-19. We understand the measures put in place to contain the virus have resulted in many business operations changing in a dramatic and unpredictable way.

We provided guidance for trustees where their sponsoring employer is at risk or had asked them to reduce or suspend DRCs. We also recommended that trustees consider any such requests in light of the employer’s corporate health, balancing considerations around the needs of their scheme and the sustainable growth of their sponsoring employer.

Requests to suspend or reduce DRCs

At such unprecedented times, we understand trustees may experience difficulties getting access to management. We also recognise that management forecasting may be difficult for some employers at this time. Consequently, trustees may not be able to immediately obtain information required to assess covenant and affordability.

Where employers make a request for an immediate reduction or suspension of DRCs due to liquidity constraints but are unable to (a) provide time for trustees to carry out analysis and take appropriate advice and/or (b) provide trustees with the financial information required to fully assess the employer’s position, we expect any reduction or suspension of DRCs to be limited to the shortest period possible and certainly by no more than three months.

As part of any agreement, we expect employers to commit to providing trustees with all information required in a timely manner. The less confidence the trustees have that they will have access to timely and relevant information, the shorter the reduction or suspension should be. In addition, we expect trustees to ensure that dividends and other forms of shareholder return are suspended (as well as other forms of value leaving the employer covenant), with this underpinned by legally binding commitments. We also expect trustees to consider how other creditors are supporting the employer to ensure equitability of treatment.

Trustees’ consideration of the appropriateness of a suspension of DRCs is particularly key where DRCs in the proposed suspension period are substantial (eg where a one-off, large, single payment is due or where DRCs are paid annually and the next one happens to fall in the suspension period).

As the current environment evolves, trustees should continue to monitor covenant and affordability of DRCs. However, we recognise stability may not be restored for some time. In the absence of clear covenant visibility in the short to medium term, we expect trustees to continue to offer only short-term concessions until more reliable covenant visibility is available. Trustees should be mindful of how other creditors are supporting the employer when agreeing any concessions, to ensure continuing equitability of treatment. Where the employer’s lenders are willing to agree support for longer than 3 months, it may be appropriate for trustees to agree support of the same duration to provide stability.

Trustees may agree to a longer suspension/reduction period, but this should be fully considered in line with our 20 March 2020 guidance, ie with full information on the business case for additional reduction/suspension of DRCs, and should ideally be underwritten by any available protections.

There are different mechanisms for ‘deferring’ DRCs. For example, the Schedule of Contributions could be amended, and contributions deferred to later in the recovery period. Alternatively, the trustees could agree temporarily not to pursue the employer for non-payment of contributions. We expect trustees to take legal and actuarial advice on this as the consequences and impact will be different for each scheme. For example, a failure to make a payment under the Schedule of Contributions may trigger the scheme’s wind-up rule, in which case the trustees should consult with the scheme actuary and consider amending the Schedule of Contributions.

Whatever legal mechanism is used, we ideally expect reduced/suspended contributions to be repaid within the current recovery plan timeframe and the recovery plan not to be lengthened unless there is sufficiently reliable covenant visibility available to suggest otherwise (for example, if the existing recovery plan is short). However, we recognise that it may be many months before employers can provide that visibility while undergoing serious liquidity issues.

We expect trustees to comply with their obligations to report to us as we cannot waive the statutory obligation, but we do not intend to use our regulatory powers in respect of either late reporting or failure to make contributions over the next three months.

We will revisit our position once more is known about the potential impact of COVID-19.

Requests to suspend or reduce payments for future service

Where schemes are open to future service, employers might also make a request for an immediate reduction or suspension of future service contributions, for the employers and possibly members.

These requests should be treated in a similar way as requests to reduce or suspend DRCs, as laid out in the section above.

Trustees should note, however, that there are some additional issues to consider regarding future service contributions, as follows:

  • Member contribution rates may be set out explicitly in the scheme’s rules and so trustees should consider whether a rule change is required to accommodate a reduction or suspension.
  • Trustees of multi-employer schemes should be mindful of any unintended consequences such as accidentally triggering wind-up or an employer cessation event and should take legal advice.

Amending future accrual

For a range of legal and practical reasons, it is unlikely that, for open schemes, ‘pausing’ or ceasing future accrual is an appropriate temporary option. However, trustees and employers may wish to discuss it with their advisers.

Payments to related entities or shareholders

In the event employers request to reduce or suspend DRCs, we expect the payment of dividends and other forms of shareholder return to cease and this should be underpinned by legally binding commitments.

Trustees should also consider what is being asked of other creditors to ensure the scheme is being treated equitably.

We acknowledge that some employer groups have complex intergroup funding arrangements. Ordinarily, these arrangements should not restrict an employer’s ability to adequately support its scheme. However, given the current extraordinary circumstances and the seriousness of the impact on employer liquidity which will have prompted the request to suspend DRCs, trustees should generally ensure that the employer is preserving its liquidity rather than funding associated companies. Where extraordinary and essential payments are required from the employer to related entities to support the wider group liquidity and going-concern status, we expect trustees to fully understand the intention behind the payment and the expectation and ability of the employer to retrieve funds. Such support should be supported only where it is assessed to be in the interests of the employer. If amounts are not recoverable or readily available to meet scheme funding requirements, we expect trustees to obtain appropriate mitigation. This could include, for example, extending the reach of the covenant (eg via guarantee support) or securing contingent assets.

Requests to release security

Where employers make requests of trustees to release security, there is the possibility that if the employer fails to recover, the scheme will have lost access to a potentially valuable asset. It is very unlikely that security release is in members’ best interests. Therefore, we expect trustees to carefully consider such a request and obtain full legal and financial advice from specialist advisers.

We expect trustees to be provided with a business plan and forecasts detailing why the request is being made so trustees can assess the prospects of success to determine whether such action is in the best interests of members. Before agreeing to such requests, trustees should fully understand how relinquishing security would affect the covenant and understand what requests are being made of other secured creditors. Schemes should be treated equitably with other creditors and we do not expect such requests to be limited to them. If possible, trustees should obtain some sort of alternative security or mitigation from the employer.

If trustees have any concerns, they should contact us at customersupport@tpr.gov.uk.

Advice and governance

Employers experiencing corporate distress present more challenges than normal. Assessment of distressed covenant and employer affordability often requires specialist knowledge. Trustees should therefore consider obtaining independent external advice to support any covenant assessment and requests for concessions such as reducing or suspending DRCs. Given the current urgency of matters, trustees may decide it is appropriate to obtain targeted real time advice, such as verbal advice backed up by short (email) written advice, rather than to commission detailed reports.

Irrespective of whether trustees commission independent covenant advice, it is important, in these difficult and fast-moving times, that trustees continue to fully document their considerations and decisions. 

Where trustees undertake their own covenant assessment, we expect trustees to fully document their reasons for not taking independent advice, and their assessment and conclusions on the covenant strength. Where trustees are asked to reduce or suspend DRCs, we expect them to have a full audit trail and we may ask them to share their detailed documentation with us.

The seriousness of the issues facing employers mean that trustees should consider potential conflicts of interest on the trustee board. They should be guided by their conflicts of interest policy and should consider whether advice on managing conflicts of interest is appropriate.

Investments

In the current environment, many schemes will have experienced falls in funding levels driven by falls in investment markets and decreases in yields. For some schemes, particularly those with low levels of hedging and significant allocations to ‘risk’ assets, those falls will have been very significant. Market uncertainty will continue for some time as the impacts of the COVID-19 virus and central government policy responses feed through.

Pension funds generally have long-term investment horizons and many schemes and employers will have the ability to trade through the current challenging market conditions. However, there are some significant short-term risks for all schemes and some significant medium to longer-term risks for schemes where the employer’s longer-term prospects will be challenged. Trustees should review with their advisers, what actions (if any) might be necessary.

We would recommend that trustees consider the following:

  • Their expected scheme cash outflows over the short to medium term and where they expect those cash outflows to be met from.
  • How their expected scheme cash outflows and inflows might vary. For example, in times of economic stress, member movements (eg retirements, early retirements, transfers and, where funded, death benefits) may increase the requirement for cash. In addition, some trustees may be asked to reduce or suspend expected DRC payments (see above) for a period to help with their short-term business cashflows, which could reduce an expected source of cash.
  • The investment strategy and investment mandate rebalancing requirements they currently have in place. In some instances, trustees may feel it is appropriate to suspend or refine these requirements.
  • The degree of diversification and the extent of any concentrations of risk in specific investments or sectors they currently have through their investment arrangements or investment mandates. In some instances, trustees may feel it is appropriate to consider making changes in relation to certain exposures (or levels of exposures) to specific investments or sectors.
  • The appropriateness of the derivative positions and structures they hold, and their collateral management arrangements.
  • The extent of their exposures to certain counterparties.
  • The timing of any pre-agreed asset transitions, incremental strategy changes or de-risking milestones.
  • The terms of reference for any subcommittees to ensure they can continue to function in the event of trustee incapacity or absence. This might include a review of quorate and sign-off/signature requirements. 
  • The schedule of delegated responsibilities to ensure activities can be carried out in the event of trustee incapacity or absence, for example where the chair of the investment subcommittee or trustee board is required to authorise disinvestments of certain levels.
  • Where trustees have serious concerns about the ability of the employer to trade, they should consider whether any investment and risk management actions are needed to help protect their members’ benefits.
  • Their current integrated risk management (IRM) policy and monitoring framework.
  • Their current investment and risk governance arrangements. Trustees may feel an alternative governance structure might be more appropriate, for example to enable investment and risk management decisions to be made more quickly.

Trustees should also be mindful that market dislocations can also present opportunities. They should consider with their advisers how they might evolve their investment strategies or arrangements at an appropriate time. Some of these opportunities may involve:

  • value enhancing investment opportunities
  • value preservation activities, for example through proactive management of deteriorating risks, or
  • where funding levels permit, risk transfer opportunities through buy-in or buy-out activities

Transfer values

Trustees should give greater attention to the heightened risk of members being targeted by scammers and unscrupulous financial advisers.

Volatility in financial markets and the deterioration in funding levels that many schemes have experienced over recent weeks may mean trustees will want to review the terms they are offering for cash equivalent transfer values (CETVs). Additionally, some schemes may have seen or may see a significant increase in demand for CETV quotations. This will place additional strain on schemes’ administrative functions. For some schemes, this additional strain will be detrimental to the membership as other administrative functions such as pension payroll and retirement quotations will be impacted.

In order to review CETV terms and/or to assess the administrative impact of any increase in demand for CETV quotes, trustees may decide to suspend CETV quotations and payments for up to three months.

This may mean breaching the disclosure requirements associated with the CETV process. We cannot waive the requirement for trustees to report either of the above actions to us but we won’t take regulatory action against trustees over the next three months in relation to this. The Pensions Ombudsman will take TPR’s guidance, and the impact of the coronavirus generally, into account when determining whether trustees took reasonable action.

If, at the end of the three-month period, trustees feel it is still in the best interests of their members to continue with the CETV suspension or delayed quotation, they should notify us in the usual way. Trustees should, however, be clear about their reasons for the continued suspension or delayed quotation. These reasons may include continuing significant financial market uncertainty (leading to uncertainty over the appropriate CETV terms to apply), lack of liquidity or administrative constraints.

Trustees may also wish to review the terms they offer for other benefit options such as cash commutation at retirement and early retirement terms. Terms for these options will be much more specific to individual schemes, determined by scheme rules.

Trustees will need to determine how to communicate their approach to members and how to deal with requests for quotes and payments that are currently being processed. However, some trustees will feel able to continue to provide CETVs as normal, particularly if they have not seen any material deterioration in funding and/or covenant.

Coronavirus Job Retention Scheme

The Coronavirus Job Retention Scheme provides essential support for workers and employers at the current time. It also supports an employer’s ability to make pension contributions. Find more information about the Coronavirus Job Retention Scheme and what this means for employer pension responsibilities.

What you can expect from us

The current scheme-specific funding regime is flexible enough to cope with the impact of a severe economic downturn but we appreciate that schemes will be affected to a larger or lesser extent depending on their circumstances, and some may face significant challenges.

The regulatory easements in this announcement will be maintained until 30 June 2020, but we will review this date as matters progress. We will continue to consider, as we do above, whether more specific flexibilities or restrictions are required (in the context of developing public policy responses). We would also like to reassure trustees that we will take a reasonable, pragmatic and proportionate approach to our regulation of scheme funding and continue to reflect prevailing market conditions in our operational processes.

The Pensions Ombudsman has confirmed it will take into account our latest guidance on COVID-19 issues if it receives complaints about delays caused by COVID-19 circumstances. Read The Pensions Ombudsman statement on COVID-19.

Schemes in relationship-managed supervision

Many relationship-managed schemes will have already spoken with their named supervisor. In light of the current exceptional events, we are refocusing our relationship-managed supervisory activity, focusing more on near-term risks rather than the standard activities in our supervisory cycle. We will be speaking to relationship-managed schemes to better understand their position and the risks and issues that have arisen.

Please continue to contact your named supervisor to discuss any issues.

Other schemes

Our event and rapid response supervision teams will lead for those schemes who are not in relationship-managed supervision. We will continue to take a risk-based approach in our supervisory activity, reviewing and assessing incoming requests against a range of risk indicators.

Please contact us via customersupport@tpr.gov.uk if you require assistance. Given the current circumstances, please use email rather than write by post.