2020 Trustees very recently hosted a useful webinar discussing deficit reduction contributions (DRCs) deferral requests. I chaired the panel, offering my own expertise in distressed situations, while my colleague Duncan Willsher offered his valuable investment-related input. In addition, Jane Evans, Pensions covenant advisor from EY provided expert guidance on covenant and Neil Smith a partner at CMS outlined the legal aspects to be considered when Trustees assess a request for a deferral of deficit reduction contributions (DRCs).
We were also delighted to have TPR’s Director of Supervision, Mike Birch join us to provide some interesting insight into the TPR’s position on the issue.
Mike acknowledged the difficulties faced by Trustees when considering such requests and highlighted the importance of sponsors and Trustees continuing to work together during these trying times, especially with no end in sight to the current lockdown and the lack of any foreseeable economic upside. Emphasis was made, however, of the importance of schemes being treated equitably with other financial stakeholders.
Annual funding statement reiterates importance of collaboration
Coincidentally, the webinar was ideally timed with The Regulator’s Annual Funding Statement issued on 30 April in which Mike’s point on Trustee and sponsor collaboration is reiterated. It is vital for scheme members to have a strong employer in order to assure the best possible outcome for them.
Affordability will remain key and whilst flexibility is encouraged, in terms of triennial valuations and recovery plans, equitable treatment with other creditors remains pertinent. Therefore, any future upside enjoyed by sponsors should be shared with schemes where DRC’s have been deferred. As part of this, TPR counsels against employers paying shareholder dividends or, that there is any other form of covenant leakage until they have put their pension schemes firmly back on track to meet their long-term goals, a move that 20-20 Trustees (20-20) supports.
Again, the best interests of members should always come first and any flexibility afforded to the sponsor needs to be in their best interests and should ideally be supported by adequate protection/mitigation.
20-20 Trustees experts happy to offer advice to Trustees
Currently, there is no end to the crisis in sight. TPR suggests Trustees revisit long term targets and journey plans made prior to the current crisis as they could see a significant reduction in covenant strength. This could result in a sponsor’s ability to fund a scheme over what might hitherto have been a relatively short period being seriously jeopardised. These are difficult times and our team at 20-20 is already advising and assisting numerous schemes in relation to DRC deferral requests.
The funding statement also reminds Trustees of the importance of Integrated Risk Management and Trustees should have an investment strategy that does not run inappropriate risks. We are reminded that whilst schemes with small allocations to equities and high hedging levels have fared well through the recent market volatility, those exposed to the stock market have suffered.
If having read the funding statement you feel you need guidance or advice during these unprecedented times, 20-20 Trustees are happy to speak to you on an initial, informal basis at no cost. Contact me at firstname.lastname@example.org or 07909 976 560. You can also listen to the webinar here.