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Pension trustees must be ready for possible sponsor distress, says regulator

Ref: PN20-31

Issued: Thursday 12 November 2020

Trustees of defined benefit pension schemes should act quickly to protect savers if they spot the warning signs of employer distress or insolvency, The Pensions Regulator (TPR) said today (Thursday 12 November). 

Despite government economic support packages, COVID-19 continues to have a profound impact on the economy, challenging scheme sponsors and the pensions industry.

Trustees are the first line of defence for savers and their pension schemes. It is vital they actively monitor their employer’s health to look for warning signs and are ready to act as the economic impact of global events develop. They should also be prepared for any issues arising from Brexit.

TPR has published guidance urging trustees to prepare now for the possibility their sponsoring employer faces difficulties. It also highlights issues arising from corporate transactions (Mergers and Acquisitions) and how trustees should engage in these.

TPR’s Director of Supervision, Mike Birch, said: “When sponsoring employers experience financial distress or make business disposals it can cause significant risks to DB schemes and we know that sadly, in the current climate, some employers are struggling. The current environment is also leading to an increased level of corporate transactions, some of which are completed in response to distress.

“Trustees are the first line of defence for savers. The faster they act, the more options and greater time they’ll have to protect members’ retirements. Trustees should know the signs of distress, and preparations can be made before these signs appear.

“As part of our clearer, quicker and tougher approach, we expect schemes to be treated fairly by employers. So, trustees must be ready to engage with a sponsor’s management team regularly and quickly when they spot any risks.

“Our guidance will help trustees prepare, by adopting an integrated risk management approach, with workable contingency plans and suitable triggers.

“Ultimately, if trustees cannot agree a way forward with their sponsor and need our support, they can contact us, and we will risk assess those requests and intervene if appropriate.”
Mr Birch added that trustees should monitor their employer’s trading and, where the employer needs to undergo restructuring or refinancing, or is making disposals, they should have open discussions with the employer and other stakeholders to ensure that the scheme is being treated fairly to protect the best interests of their members.

The guidance makes clear that trustees should ensure they have access to relevant and up-to-date employer business and financial information. It highlights potential signs of corporate distress, outlines TPR’s expectations on trustee risk management and sets out what can be done to protect schemes.

These situations are complex and often time-pressured and may not be something trustees have experienced before. If trustees don’t have the skills and understanding to manage a distress or insolvency situation they should take appropriate professional advice.

The guidance includes illustrative examples showing how a scheme’s position can be worsened by corporate activity or sudden changes in fortunes and TPR’s expectations on trustees in such circumstances.

Notes to editors

  • the guidance follows TPR’s Annual Funding Statement, published in April, in which the regulator outlined how DB schemes should approach scheme valuations and how trustees can balance impacts on employers while putting them in a stronger position to improve their funding positions
  • TPR is the regulator of work-based pension schemes in the UK. Our statutory objectives are: to protect members’ benefits; to reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only)

Press contacts

Dan Menhinnitt

Media Officer
01273 349511

Matt Adams

Senior Media and Parliamentary Manager
01273 662086

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