Covid-19: Pensions Regulator provides guidance on defined benefit scheme funding and investment

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On 27 March 2020 the Pensions Regulator published its latest guidance relating to Covid-19.  The guidance is particularly relevant for schemes currently undergoing an actuarial valuation as well as for employers who are seeking to suspend/delay deficit recovery contributions (DRCs). The key points from the guidance are considered below.

Schemes completing their valuations now

Some schemes are in the process of completing their actuarial valuations at the moment. The Regulator’s guidance is clear that the Regulator does not expect trustees who are close to completing their valuations to revisit their valuation assumptions. That said, whilst trustees are not required to take into account post valuation experience, the Regulator expects them to consider that experience 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, the guidance provides that they may decide to delay their recovery plan submission by up to three months. The Regulator comments that although it cannot waive trustees’ statutory obligation to submit a valuation within 15 months of its effective date, it will not take regulatory action in respect of a failure to submit.

Employers’ requests for contribution easements

Requests to suspend or reduce DRCs

The Regulator comments that in accordance with its earlier guidance, trustees should be open to requests to reduce or suspend DRCs. Trustees may not have sufficient information in order to make a fully informed decision, however.  In that case, 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. The Regulator notes that trustees will need to consider carefully any requests to suspend or reduce DRCs if they are expecting annual or substantial contributions.

The guidance provides that deferral should not be longer than three months. A condition of the trustees’ agreement should be full and ongoing provision of information so that the 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. However, extensions beyond this three month period may be appropriate where other creditors commit to support for longer periods and restrictions on trustees’ extensions would limit that support.  That said, 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.

The Regulator notes that trustees should take legal and actuarial advice not only on whether a suspension or reduction of DRCs is appropriate, but also on the most appropriate method to suspend or reduce DRCs. This is to avoid unintended consequences such as missed payments accidentally triggering scheme wind-up.

The guidance notes that the Regulator ideally expects suspended or reduced DRCs to be repaid within the current recovery plan timeframe and the recovery plan is not to be lengthened unless there is sufficiently reliable covenant visibility (for example, if the existing recovery plan is short).

The Regulator comments that it cannot waive trustees’ statutory obligations.  However, it will not take regulatory action in respect of late reporting or a failure to make contributions during the three months after the 15 month period for completing an actuarial valuation.

Requests to suspend or reduce payments for future service

The guidance provides that 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, the Regulator recommends legal advice is taken.

Payments to related entities or shareholders

The guidance notes that 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.  However, 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. In that instance, the 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

The Regulator is clear that 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 the Regulator if they are concerned.

Advice and governance

The guidance provides that trustees should consider whether real time, specialist advice is required in the circumstances of the case. It is important in these difficult times that trustees continue to fully document their decisions, whether they seek advice or not.


The Regulator’s guidance also considers what trustees should be doing in relation to scheme investments. In particular the trustees should:

  • 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.
  • Review any previously agreed investment and risk management decisions due to be implemented in the future 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.
Employers of DB schemes provision of information to trustees

The guidance acknowledges 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.

The Regulator’s overall approach
  • The Regulator will take a reasonable, pragmatic and proportionate approach to its regulation of schemes.
  • The Regulator will continue to reflect prevailing market conditions in its DB operational processes.
  • The regulatory easements announced will be maintained until 30 June 2020, but will be reviewed 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 if they require assistance.

WM Comment

It is helpful that the Regulator has published some guidance which is directed at the funding and investment issues faced by defined benefit scheme trustees and employers.  For every scheme which has to deal with the challenge of a distressed employer, other schemes are facing up to finalising their valuation in a climate which has changed substantially over an incredibly short period of time. At the end of the day it is surely better for scheme and their members that the Regulator provides assistance for employers to try to weather the current crisis, rather than for an increased number of schemes to potentially end up in the Pension Protection Fund.

At the same time it will not necessarily be an easy decision for trustees to agree to suspend or reduce DRCs. The trustees will need to weigh up the case put to them by the employer and take all necessary advice before making a decision.  The trustees should note that employers are unlikely to be able to gather the same level of financial and forecasting data they would in normal times.  In addition the trustees need to ensure that any decision to reduce or suspend DRCs does not result in cashflow issues such that pensions are unable to be paid.

Although we have not commented on this above, it is welcome that the Regulator will not take regulatory action against trustees who suspend transfer payments for the next three months.  The Regulator in its 20 March 2020 guidance had already highlighted the risk of scams in relation to members who are looking to transfer out.