I sat in my summer house a couple of weeks ago fixing a new cedar shingle to the roof and my mind drifted onto what COVID-19 might mean for pensions. Would businesses go bust? Would the Government’s support packages mean our economy might not suffer too long and we would avoid a deep depression? Or would we struggle for decades paying off the nation’s debt? We don’t know yet; radical change may be the result. However, in the short term, trustees should not simply just wait and see what happens.
As a veteran of recessions since the mid-1970s I have learnt that doing nothing is not the thing to do. A swift appraisal and decisive action (which could include a decision to do nothing) is essential if the interests of members are to be best served.
Is it likely the employer will survive the crisis? If the employer might not be a lost cause, it could make sense to cut them a bit of slack, if they ask and need a short contribution deferral. There isn’t much to lose if they don’t currently have the cash to pay the contributions. It also offers the opportunity to get management’s attention and assess whether they can survive the lockdown. Any refreshed company cashflow forecast, with reasonable assumptions, will offer some indication of how well the business will emerge from the crisis and your chance of getting contributions. The existence (or absence) of such a forecast, and the focus (or otherwise) of management, will also be a useful indicator of what might happen in due course.
On the other hand, if the employer was really struggling before the crisis and it is clear they will not survive, allowing them to burn through their assets will only worsen the position for the pension scheme. At this point, procrastination is not an option and drastic action may be needed to maximise scheme recovery.
Then, when trading starts again, there is a need to watch that the employer doesn’t over-trade. It is quite usual for a profitable business to go bust as it exits a recession. They make sales, buy materials to make their product (on 30 days credit), spend a couple of weeks making and distributing it and then invoice for the product on at least 30 days credit). By that time, the suppliers are due to be paid and the employer doesn’t have the cash from the sales to pay them. As sales increase month by month, they often simply run out of cash and go bust when one of the suppliers loses patience. Understanding the business, its strategy and its cash flow will be essential for trustees to make sure that members’ best interests are served.
Some viable businesses will be so burdened with debt as we come out of recession, they won’t be able to pay what is due, despite profitability. The smart thing for trustees to do then is explore a restructuring to get employer debt to a
supportable level. Whilst that may mean the scheme has to agree to debt compromise, a better recovery from a restructuring is preferable to a poorer one from an insolvency. Early engagement with management in that process (and perhaps even initiating the discussion) will always put trustees in a better position to protect members’ interests.
Other employers will, sadly, see the crisis as an opportunity to try to reduce exposure to their pension scheme. Again, proactive engagement is essential to prevent being hoodwinked or outmanoeuvred. On the upside, there will be employers with the ability and intention to support the scheme in the normal way. We all want one of those!
The depth and severity of the anticipated recession will drive scheme asset values, and therefore, scheme valuation figures, in an unhelpful way for an employer who is not that well-placed to support its scheme. Unfortunately, that will simply exacerbate the issues it faces and make it even more important for trustees to focus on the scheme in the round – assets, liabilities and covenant. It will need more than quarterly trustee meetings to do that effectively.
That brings me to where my mind wandered whilst I was on the roof of my summer house.
- Will the coming demands on trustees mean we suddenly lurch to having all schemes managed by professional trustees, who can devote the necessary time and skill to a scheme, and whose management of it more than justifies the fee because members are better off?
- Will the economic pressures on employers mean that we start to think of new ways to make schemes more economical to run?
- Does it make sense for each scheme to have its own individual set of rules, on which advice must be sought on questions which are a product of today’s world rather than the one in which the rules were drafted?
- Would it make sense to get economies of scale by having assets managed collectively – especially if benefits were homogenised?
- Can trustees justify paying asset managers vast fees, given that every pound paid out is a pound taken from a pensioner’s pocket, unless the manager really is worth the money they charge?
Maybe the seismic shift brought about by our current circumstances will cause us to think the unthinkable. After all, who thought just a few weeks ago that we would be conducting business by video conference in casual clothes from our homes whilst our children play beside us?
This article was featured in Pensions Aspects magazine June 2020 edition.
Last update: 19 January 2021