The Pensions Regulator (tPR) has released guidance, aimed at trustees of DB schemes, for protecting schemes from sponsoring employer distress.
Whilst sponsoring employer insolvency can occur at any time, the current economic backdrop within the UK (and wider) including Covid-19 and Brexit has increased the risk of some sponsoring employers becoming insolvent.
The guidance acts as a reminder as to what actions trustees should be undertaking during these uncertain times, whilst also offering practical recommendations for identifying distress within a scheme’s sponsoring employer.
The guidance covers the following key points:
Best practice Integrated Risk Management approach
Integrated Risk Management (IRM) should be at the forefront of trustees’ minds. tPR is placing great emphasis on trustees using the scheme’s existing IRM framework or revisiting the IRM framework to ensure it is fit for purpose. Trustees should ensure processes are documented and workable contingency plans are in place to mitigate key risks.
Trustees should have a good understanding on the sponsoring employer’s legal obligation to their scheme and possible outcomes for the scheme in a hypothetical insolvency scenario. Professional advice is recommended for any trustees who do not have the knowledge or expertise to assess these areas.
Review scheme governance
Trustees should regularly review various aspects of scheme governance including trustee skills and experience, conflicts within the trustee board, clear documentation and record keeping and agreed information sharing protocols. Separate guidance on these aspects is available on tPR’s website.
Monitoring the sponsoring employer’s covenant
Monitoring the sponsoring employer’s covenant is integral to the IRM framework. The strength of the sponsoring employer‘s covenant will underpin both the scheme’s investment strategy and the assumptions used within the funding valuation. As such, great importance is placed upon trustees seeking regularly financial updates from the sponsoring employer.
tPR urges trustees to continue to seek financial information from the sponsoring employer at regular intervals as this may help to detect distress within the company at an early stage. Key warning signs of financial distress include the following:
- Cash flow constraints.
- Credit downgrades.
- Removal of trade credit insurance.
- Disposal of profitable business units.
- Loss of a key customer.
The above list is not exhaustive, but will form a good starting point for trustees to identify early warning signs.
Should the trustees consider that the sponsoring employer is exhibiting early financial distress signs, there are suggested actions detailed within the guidance document.
With job uncertainty and increasing levels of unemployment, tPR has reminded trustees of their duty to remain alert to the possibility of scheme members falling a victim to a pension scam. tPR recommends that trustees continue to highlight this risk to members.
The above is a high-level overview of the guidance. If you would like to review the guidance in more detail, please use the following link: tPR
Quantum welcomes this timely guidance from tPR reaffirming one of the key areas that has been on tPR’s radar for some time. This guidance urges trustees to identify distress signs as early as possible in order to place the pension scheme in a better position and, ultimately, better protect members’ benefits.
If you would like any further information in relation to the above, please get in touch with your usual Quantum Advisory contact.
18 November 2020