Covid-19: what does it mean for pension schemes?

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We are all living in difficult and testing times.  The COVID-19 pandemic has resulted in unprecedented pressures on cashflow for the business community and global stock markets have suffered significant falls over the last few days.  Against this backdrop pension schemes (whether defined benefit or defined contribution) face their own challenges.

Challenges for pension schemes

UK pension schemes will undoubtedly face a number of challenges as a result of COVID-19.  These challenges range from the immediately practical to the long term.  One of the main immediately practical issues is to ensure that day to day scheme administration can continue. The global stock market falls of recent days is likely to result in possibly both immediate and longer term funding and covenant issues.

The Pension Regulator’s guidance

On 12 March 2020 the Regulator published the first of what is likely to be many statements on the effect of COVID-19 on UK pension schemes. It was then followed up by further guidance on 20 March 2020.

Trustees: scheme administration issues

The Regulator expects trustees both to have a business continuity plan in place for their scheme and to understand the business continuity arrangements for their service providers, for example third party administrators. In particular “trustees should understand what contingency is in place to mitigate any under-resourcing due to, for example, increase in work volumes or unavailable staff. They will also want to establish which scheme activities would be prioritised in the event of under-resourcing, for example pensioner payments, retirement processing and bereavement services, and confirm this with their administrators / providers.” The Regulator commented in its 12 March statement that it is currently engaging with key administrators to understand their current preparedness.

Trustees: protecting members from scams

The Regulator notes that savers may look to transfer their pension benefits to another arrangement as a result of their employer’s instability or the fall in the financial markets.  As such the Regulator considers that members may be more likely to be scammed.  The Regulator states that members should be advised to exercise extreme caution before they transfer their benefits and visit ScamSmart which has specific guidance relating to COVID-19.

Trustees should also signpost their members to the Money and Pensions Service – particularly those approaching retirement and whose pension may have been affected by the current economic conditions.

Trustees: employers who are distressed

The Regulator considers that it is important that trustees understand the position of the employer in these difficult times.  The guidance sets out a series of questions to put to the employer.  The questions include:

  • Has the employer considered how the impact of the virus and the measures to contain it may affect demand for its products, their business continuity plan and cashflow
  • Are there any key payment dates in the next three months that will affect the business (eg rent quarter dates)?
  • What are the positions of lenders?
  • What are the positions of key suppliers and creditors? Have they imposed any restrictions on normal credit availability or supply volumes?
  • What payments are proposed to associated or connected companies or shareholders in the next six months? Is this appropriate in the context of the directors’ primary duties to their creditors where there is uncertainty over the solvency of the employer?
  • What support is expected to be available for the employer under the package of measures announced by the Chancellor on 17 March 2020? What is the timescale for this and are any key conditions attached?

The Regulator is clear that trustees should also consider the approach taken by other creditors, shareholders and associated companies to ensure that the scheme is being treated fairly.

Some employers may seek to defer the payment of deficit recovery payments (DRCs). The Regulator comments that this action may be appropriate but that the trustees should consider any request carefully to ensure that any support given is part of a co-ordinated and fair response across key stakeholders.

The guidance sets out the following principles for trustees to take into account when considering requests to defer DRCs:

  • establishing the need: trustees should understand the drivers for the request and ensure that payments will not be made to related entities or shareholders,
  • ensuring all parties are playing their part: banks should be supportive of the business. Where other parties are strengthening their access to the employer’s assets through security the trustees should ensure that the scheme is given a fair share of the new security. Agreements should be put in place to prevent new dividends or intra-group loans.
  • flexibility ability to restart making DRCs: any suspension should have an end date but also triggers to restart if trading returns to normal
  • ensuring the trustees are well advised: legal and covenant advice should be taken from advisers with experience in situations of corporate distress and restructuring
  • getting the right information and taking account of what is achievable in the time available: where timescales are very short, any concessions should be short term deferrals to enable information to be provided later for a more considered decision.

Scheme administrators

The Regulator states that administrators should prioritise payments of benefits, retirement processing and bereavement services, as well as any administrative functions required to support these.

The Regulator accepts that many non-critical trustee and member services may be affected by the COVID-19, for example administrators may have to delay responding to member queries or producing annual benefit statements.

Trustees and administrators should report to the Regulator immediately if they believe they will be unable to pay members’ benefits. The Regulator comments that it will take a pragmatic approach in its response.


The Regulator recognises that this is a challenging time for everyone and that it is putting a strain on employers.

The Regulator comments that it will take a proportionate and risk-based approach towards enforcement decisions, in light of these challenging times, with the aim of helping to get employers back on track and supporting both employers and savers.

Timings of the Regulator’s communications, publications and events

The Regulator is temporarily suspending all regulatory initiatives.  The Regulator comments that if a scheme has been selected to take part, it will be in direct contact regarding our expectations and next steps.

In its 12 March guidance the Regulator states that it would publish guidance for schemes with funding valuations in March and April as part of its annual funding statement.  It is not clear whether or not this will go ahead.

WM Comment

We are living though strange and challenging times. For employers with defined benefit schemes it is to be hoped that the Regulator, as it did in 2008 with the credit crunch, allows for post valuation changes to be taken into account for valuations. Whilst the Regulator has commented that its funding consultation is still open it will also be interesting to see whether or not the current situation means that it steps back from its recent more aggressive stand point as to how quickly schemes should be funded.

If trustees or employers have any questions about the impact of COVID-19 on the pensions industry please do not hesitate to contact a member of the Walker Morris pensions team.