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Distressed pension schemes: trustee preparations

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The Pensions Regulator (TPR) has encouraged trustees to put early warning systems in place to enable them to react quickly if a scheme sponsor becomes distressed.

TPR issued numerous sets of guidance during the pandemic to help trustees with the management of their schemes, including guidance covering distressed schemes.

The guidance sets out the steps that need to be taken to ensure that trustees have robust processes and procedures in place and are prepared if a scheme sponsor goes into a distressed situation. The key steps revolve around having an early warning mechanism in place based on integrated risk management.

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

What is integrated risk management (IRM)?

IRM is a risk management tool that helps trustees identify and manage the factors that affect the prospects of meeting the scheme objective, especially those factors that affect risks in more than one area. The overall strategy the trustees have in place to achieve this objective will be dependent on the scheme's and employer's circumstances at any point in time.

The Pensions Regulator's guidance requires trustees to have an early warning mechanism in place based on integrated risk management.

The output of an IRM approach informs trustee and employer discussions and decisions in relation to their overall strategy for the scheme. This covers risk capacity, risk appetite and contingency planning, as well as the assumptions to be used for calculating the scheme's technical provisions and any recovery plan. If a scheme has a secondary funding target in addition to the statutory funding objective, or journey plans, then IRM also helps to manage the scheme against this secondary target or plan.

IRM is a method that brings together the identified risks the scheme and the employer face, in order to see what relationships there are between them. It helps to prioritise those risks and to assess their materiality. IRM can take many forms, but should involve an examination of the interaction between the risks, and a consideration of 'what if' scenarios, in order to test the risk capacities of both the scheme and the employer. Quantification of risks may help these considerations, but the rigour of quantification should be proportionate to the risk and resources available.

Early preparation

Trustees should review their processes and procedures so that they are prepared for dealing with the situation should a sponsor go into distress. Using IRM will ensure that trustees have early warning mechanisms in place, and enable them to run different scenarios and establish how they would respond. This will also involve 'stress testing' the various scenarios.

TPR's guidance sets out the steps that trustees should follow to get prepared. Processes and procedures should be reviewed regularly to reflect what may be a fast-moving situation.

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