Distressed pension schemes: time for action

Out-Law Guide | 07 Jan 2021 | 11:49 am | 1 min. read

Pension scheme trustees must be prepared to respond quickly to signs of scheme distress, including requests from sponsoring employers to reduce or suspend the payment of deficit repair contributions (DRCs).

The Covid-19 pandemic is causing supply chain risk and a liquidity squeeze across all UK business sectors, in particular because of the risks associated with supply chains connecting us to the wider global corporate community. Companies are keen to retain cash within the business but, where there is a defined benefit (DB) pension scheme in place, they have conflicting obligations to continue to fund this scheme and also to pay DRCs where there is a recovery plan in place.

The Pensions Regulator (TPR) has issued numerous guidance documents during the pandemic to help trustees with the management of their schemes. The guidance covers having an early warning system in place for trustees so that they can identify concerns that a scheme sponsor may be becoming distressed, as well as how to deal with requests for employers wishing to either reduce or stop the payment of DRCs.

There are two distinct phases to managing sponsor distress: the 'prevention' phase, and the 'action' phase. During the prevention phase, trustees should review their processes and procedures to ensure that they are fit for purpose and will allow them to test and monitor different scenarios that may occur. The 'action' phase covers what trustees and companies should do when sponsor distress occurs.

Trustees should ensure that suitable professional advice is sought at each step.

It is important that trustees' processes and procedures not only meet TPR's guidance, but also improve scheme governance and risk management. Pinsent Masons, the law firm behind Out-Law, is unique because we have not only legal expertise, but are also experts in governance and risk management with backgrounds in pension scheme management, trusteeship, consultancy and pension administration. This means we can confirm that scheme processes and procedures will not only meet the guidance and legal requirements but also ensure that scheme governance and risk management will meet the highest standards. We are also able to undertake the management of the plan for the scheme going forward.

Time for action

Trustees will have completed the steps within the prevention phase. However, that is no guarantee that the employer will not become stressed. The 'action' phase can be broken down into four stages:

  • Sponsor crisis mounting

    The preparations the trustee has put in place during the 'preparation' phase should assist them as a crisis emerges. The early warning system that the trustee has put in place will need to be developed at this point.

    The trustees should:

    Liaise with TPR: ensuring they have access to up to date information and are ready to respond to TPR requests. Check with legal advisers about what is disclosable and what effect legal privilege has on liaising with TPR. Make sure that there is more than one representative of the trustee and, if possible, the scheme secretary on all calls and at all meetings, with advisers as appropriate.

    Additional meetings: check that there is sufficient resource in place to support these.

    Advisers: consider if additional advisers such as specialist financial restructuring advisers are needed and, if so, arrange for their appointment.

    Member concerns: consider how best to liaise with members, perhaps by way of standard responses.

    Contingency planning: put in place a contingency plan at the earliest opportunity.

    Resource: ascertain whether there is enough support and whether there is extra resource that can be made available, potentially at short notice. Identify at what stage this is likely to be needed.

    Secretariat: review secretariat support and whether extra help is needed to support the pensions team - particularly a scheme secretary and pensions manager.

    Meeting logistics: consider how trustee meetings can be run in the context of Covid-19 and social distancing requirements. The trust deed should be checked to ensure that electronic or telephone meetings and electronic decision-making are possible and valid. Check quorum requirements for any subcommittee and check the trust deed to ensure decisions can be delegated, and ensure that 'short notice' requirements are reviewed so that meetings are valid.

    Compile a catalogue of guarantees including PPF guarantees and, if necessary, have them checked for validity and enforceability.

    Employer covenant: implement the plans set out during the preparation phase.

    Trustee training: establish whether specialist trustee training is required to enable the trustee to understand issues related to insolvency or restructuring. Arrange training for the trustee - and the scheme secretary - if required on flexible apportionment arrangements; regulated apportionment arrangements; TPR guidance on deficit contribution reductions; easements on valuations resulting from Covid-19 and TPR's Covid-19 guidance; how and when PPF and other guarantees are triggered; and refresher training on conflicts if previous training was some time ago. Training may also be needed on perceived or actual conflict issues.

    Conflicts of interest: ensure a register of perceived or actual conflicts is kept up to date.

    Communications: implement a communications policy identifying how the trustee communicates with members.

    Fees: agree with the employer that it will fund all the additional expenses arising from any corporate event, such as restructuring, above and beyond normal day to day scheme management.

    Filing: organise the filing. Draw up a list of contacts of all investment and AVC providers and advisers. Pull together a full set of the scheme documents. Retain all correspondence between the company, trustee and TPR, and keep records of emails, letters and meetings. Make sure this is all accessible and searchable.

    Develop – and keep – a list of advice and from whom, and decisions taken, in chronological order so they can be accessed easily.

    Benefit payments: check whether the company pays pensions or operates any banking, and consider the options. Establish whether payroll and back-ups need to be moved away from the employer's servers.

  • Sponsor crisis arrives

    When the crisis arrives, additional administrative and governance steps will need to be considered.

    Resource: check that you have sufficient resource.

    Payroll and banking: move payroll and banking facilities to a third party if required, and select a preferred provider.

    Data: ensure that member data and member files are accessible to extract if held on the employer's site. It is critical to consider who owns the servers where electronic records are stored - once the administrators move in it may be difficult, if not impossible, to retrieve data on the company's servers.

    PPF invoices: check that PPF invoices are paid if this is usually done by the company on behalf of the trustee. Liaise with the PPF if there is likely to be a delay.

    Transfer values and factors: liaise with administrators to implement reduced transfer values in accordance with any trustee decision arising from insufficiency report and any revised factors.

    Trustee agenda: ensure this includes regular funding updates, factor reviews and insufficiency reports – the trustee will need to review whether an insufficiency report needs to be produced or updated.

    Corporate dividend policy: monitor the corporate dividend policy and any changes to it. If dividends continue to be paid at the cost of scheme deficit contributions, TPR will be involved - and the trustees will need to consider what steps to take.

    Corporate events committee: establish a corporate events committee with powers to negotiate with the sponsor, advisers and the regulators. Ensure that the members of this committee have no conflicts, and are likely to remain in post if a sudden event occurs.

    Decision making and authorisations: plan how continuity of decision making and authorisations can continue in the event of losing a trustee suddenly.

    Risk register: update the risk register and implement any highlighted actions.

    Trustee liability insurance: explore the provisions of the trustee liability insurance and check whether insurers need to be notified at this point.

    Integrated risk management: revisit the IRM plan and contingency plans and decide if any investment, funding and covenant actions need to be taken.

    Potential changes to the scheme: model any proposals that the company is likely to make with regard to the pension scheme, the implications of those proposals and what the trustee's bottom line would be in each scenario.

    Member and other communications: communicate to members as soon as possible, as they will be concerned. Review the communications policy and amend if needed, and check that member communications take into account TPR's latest guidance, particularly in regard to transfer values.

    Plan how to keep your advisers up to date with the changing situation. One option is to set up a confidential information sharing portal, hosted by a third party, to which the trustee and advisers have access, but make sure that there is enough resource in place to manage it as circumstances can be fast moving. Make sure the trustee has contact numbers and emails for each other and their advisers.

    Member concerns: review member concerns and draft some standard responses or FAQs for the administrators. Third party administrators will need to be briefed and given standard responses to be able to deal with members' requests.

    Consider drafting a standard statement that can be put on a member website, distributed to members and within the company to employed members.

    Communicating with TPR: don't forget the regulator. Communications with TPR should be handled with care and tightly coordinated, with 'ground rules' set down from the outset. Take legal advice on the implications of privilege and disclosure. Agree a process with the trustees for keeping TPR informed, and make sure all requests are backed up in writing by TPR and informal TPR responses carefully documented for future reference. Ensure that all email correspondence is saved - preferably to the shared portal, if you have one, so the trustee can access the information.

  • Crisis escalates

    At this stage, things are becoming complex and you need to be completely on top of both administrative and governance matters.

    In-house administration: if you have this, make sure you have contingency plans for member data and member files if held on the employer's site, and ensure a back up is taken with a third party provider - you don't want to lose access to these records.

    Be ready to implement business continuity plans.

    Transfer risk warnings: make sure that your correspondence with members clearly flags up the risks of and potential for scams. Make trustee communications clear to help members who ask for 'transfer out' quotes understand the risks and true value of giving up their pension and the compensation available from the PPF. Make sure that trustee communications take into account the latest guidance from TPR.

    Resource scenario planning: consider the effects of different scenarios on any in-house administration staff – can they continue to provide support after an insolvency event? The trustee may wish to have a third party lined up to step in to manage 'key man' risk and ensure continuity of service.

    Authorised signatures and cash flow: ensure continuity for administration and investment authorised signatories. Cash flow is another important area – ensure there is access to enough cash flow to meet pension payments of up to six months, in case of PPF assessment and change of administrator.

    PPF assessment payments: check if the trustee administrator can pay PPF compensation from the assessment date, and put a plan in place for this.

    Scheme scenario planning: follow the plan produced during the 'prevention' phase and adapt scenario planning. Modelling different likely outcomes and what the trustee could accept in terms of funding, a recovery plan and investment strategy relative to the covenant will be invaluable. The trustee should be exploring all possible contingent assets and any further assets that could be considered.

    Confidentiality agreements should be in place, and the trustee must be clear on their responsibilities in this regard. Confidentiality is paramount.

    Entity priority modelling may be required by banks or major creditors.

    Knowledge: make sure knowledge transfer is captured in some way. This can be achieved by setting up a secure portal into which you can upload all governing documents, member communications, policies, benefit specifications and more.

    PPF assessment: be aware of what happens here from day one. Training on this, and the different types of insolvency and how they impact on the pension schemes, is worth doing and will help the trustee get to grips with their obligations. Understanding the scheme and its sponsoring employers is essential, so that the trustee can identify what employers must have if an insolvency event occurs before PPF assessment kicks in.

    Trustee: finalise plans for how the scheme can continue to be managed if the trustee suddenly changes. Be ready to appoint an additional trustee, such as an independent trustee, if necessary.

    Develop a media strategy. Agree who will speak to the press, and consider using a specialist consultant.

    A PR consultant can manage the press for the trustee, tracking where the story is heading and mitigating the risks of 'bad news' stories. Agree who will be the consultant's point of contact for information on funding numbers, member numbers etc., and ensure there are clear guidelines around this. Make sure the trustee and any in-house press team has the PR consultant's number for any press inquiries.

    Cascading communication: an effective policy for cascading relevant information and feedback to the trustees can help if only the chair is in the thick of the negotiations. This method is fast, and can work at all times of the day and night.

    Consider putting statements onto the scheme pensions website, the company's intranet, the pension administrator's website and, if appropriate, the company's website. Get these drafted in advance.

    Front line administrators need support to support the scheme members. After social media and news outlets, the next port of call for members will be the scheme's administrator, the scheme's pension website and their HR representatives.

    Have FAQs prepared that are updated regularly for all parties and, most importantly, keep the scheme pensions website up to date.

    Regular information sharing between advisers is required. Accurate notes should be taken of all calls with the company, TPR and PPF to ensure clarity at all times.

    Scheme secretary resource and support: the scheme secretary will be really busy at this point, and so the trustee may need to get some extra support in. Consider whether work such as minute taking and producing meeting packs can be delegated to someone else.

    If your scheme secretary is in-house, find out what happens to their services if the worst happens.

  • After the employer goes into liquidation

    At this point, communications will be key to managing the crisis.

    Draft pre-prepared statements depending on the outcome of negotiations the night before any announcement. This will probably be a holding letter to members, unless the scheme has entered immediate PPF assessment. If assessment has occurred then there are standard letters provided by the PPF which can be sent. Your legal advisers can help with this.

    PR consultants: make sure there are clear guidelines given on what information is released to the PR consultants and by whom. The obvious choice would be the trustee chair or independent trustee in conjunction with the secretary. The trustee liaison should be given the power to agree with the PR consultant what is helpful to be kept in or out of the press.

    Get ready for the parliamentary select committee. Have good advisers to ensure proper disclosure, that the necessary permissions are sought for disclosing information and ensuring requests are met in a timely manner.

    Liaise with the scheme administrator on PPF assessment and communications, including FAQs. The administrators will need instructions to cease all transfers out and to administer scheme benefits in accordance with PPF requirements. However, the timing of this will depend on the date the scheme enters PPF assessment.

    Ensure continuity of administration and liaise with the PPF as to next steps.

    Review the cash retention policy. If it has not yet been changed, it must be now to ensure continuity of the pensioner payrolls for at least six months until the PPF has appointed its preferred administrator and the administration transitioned to the new provider.

    Transferring data: plans for transferring member data and files if they are held on the employer's site must now be implemented, using the contingency plans agreed earlier in the process.

    Scheme expenses must be approved by the PPF from assessment date.

    Assist with the PPF's validation process.

    PPF assessment: follow instructions from the PPF to get the scheme into assessment as quickly and economically as possible. Move assets to be in line with the PPF's investment strategy and make sure the trustee has the appropriate signatories in place to achieve this. In all likelihood, the trustee investment consultants will be liaising with the PPF's investment managers by this stage.

    Powers to replace the trustee must be understood very quickly by the existing trustee. The scheme secretary should facilitate the appointment of the new trustee and help with a smooth handover. Once appointed, the new trustee has well established guidelines to follow to ensure as smooth a transition for the members into the PPF as possible.

    The scheme reference manual will come into its own helping the new trustee to get to grips with the scheme. It's also important that anything the ceding trustee wishes to be recorded is done, and that this is recorded in the minutes and the manual as well.

    Final documents: ensure all final documents that you believe may be needed for reference or retention in the future are uploaded into the third party portal and passed to the new trustee.