Every pension scheme and sponsoring employer is different, meaning it is vital to appoint the right specialists and professional advisers to help manage and mitigate risks to the scheme. Having good practices in place makes it easier to implement contingency plans when the need arises.
Having been Scheme Secretary to the Carillion group of schemes during their high profile insolvency case I have reflected on the lessons I learnt from that time and how they can be applied now to prepare schemes as best as possible for potential challenges they may face as the impact of COVID-19 starts to bite.
Trustees should expect their Scheme Secretary to understand the scheme and the way the trustee board works; be diligent, methodical, organised and, as such, clearly record trustee considerations, decisions and actions. Bear in mind that regulators, and even the public, may read scheme minutes and records at a later date.
The early stages of a crisis
It is important that the Chair of Trustees and Scheme Secretary think ahead to anticipate potential challenges and work in tandem to find solutions to any issues they may face. If you haven’t already got plans in place, now is the time to ensure you implement them. Here are some pointers around what will be needed.
- ascertain if they have enough support and where to source any extra resource that can be made available, potentially at short notice
- evaluate whether they have the right skills to address the challenges of financial restructuring, and arrange any trustee training needed to cope with insolvency or restructuring issues. Put in confidentiality agreements if needed
- understand and identify any perceived or actual conflicts of interest, if necessary considering appointing a specialist independent trustee
- consider how trustee meetings can be convened at short notice and in line with social distancing requirements, including checking the trust deeds to ensure that electronic meetings and decision making are permissible.
- monitor closely the sponsor covenant together with covenant advisers, taking into account the Pension Regulator’s (TPR) guidance and the integrated risk management framework
- implement a strategy for how the trustees should communicate with scheme members
- prepare for questions from TPR, maintaining full notes from any meetings and having equivalent representation for meetings with more than one TPR representative. Retain any correspondence between the sponsor, trustees and TPR;
- agree with the sponsor that they will fund all additional expenses the scheme will incur in connection with corporate events such as restructuring, and set up a cost monitoring system
- draw up an incident response plan and open up a dialogue with the Pension Protection Fund (PPF) and, if appropriate, get them involved with contingency planning for entry into PPF assessment
- monitor transfers out of the scheme and review benefit options – trustees will wish to protect the scheme’s funding and remaining members, and ensure there isn’t a ‘run’ on the scheme
- check the validity and enforceability of PPF guarantees and other guarantees, and keep these close to hand.
When the crisis deepens
Whatever the cause of a crisis, this is the busiest time. Having preparations in place already will help in managing the increased intensity.
Implement your contingency plan for in-house functions such as pensioner payroll, member data and banking facilities - access could be curtailed in some corporate events. It is wise to ensure PPF levies and scheme invoices continue to be paid if paid by the employer. Don’t forget that monitoring of scheme factors and producing an insufficiency report may be needed.
Turning to governance:
- continued monitoring of the covenant, including the corporate dividend policy and referencing your Integrated Risk Management (IRM) plan, should ensure that, as far as possible, the trustees are able to take actions to ensure the scheme deficit can be supported by the employer
- the trustees’ agenda should focus on what is important and dayto- day work delegated as much as possible. The implications on scheme funding of different sponsor scenarios is likely to be high on the agenda
- consider a corporate events committee with powers to negotiate with the sponsor, instruct advisers, deal with TPR, whilst being free from conflilcts and with good knowledge of finance issues
- plan how continuity of decision making and authorised signatories can be maintained in the event of losing a number of trustees suddenly
- explore the provisions of trustee liability insurance and check whether insurers need to be notified at this point
- use a shared information portal to keep scheme information together in one place to save on costs and duplication of efforts
- awareness of what happens from day one in PPF assessments will help trustees to understand their obligations - training on this, the different types of insolvency and their impact on pension schemes is worth arranging. Of course, understanding the scheme and its sponsors is essential so that you can identify which entities have to have an insolvency event before PPF assessment kicks in.
The crisis turns into insolvency
Having an insolvency event doesn’t always trigger PPF assessment on day one, it can take time. The PPF will need to approve any scheme expenses from the assessment date onwards.
Here are some actions to help a smooth transition:
- review the scheme’s cash retention policy to certify that pension payments can continue for at least six months to enable transition to the PPF’s chosen administrator
- instruct the current pension administrators to cease all transfers out and administer benefits in accordance with PPF requirements
- ensure all records of employers joining and ceasing to participate in the scheme are up-to-date, to assist with the PPF’s validation process
- prepare for the PPF to replace the trustees with its own panel trustees and make sure the secretary assists with a smooth handover – a scheme reference manual is useful.
Communication is key
Throughout the process, it’s important to communicate swiftly with scheme members, TPR and your advisers. Implementing a media strategy, central messaging and a policy for giving and receiving information for the trustees helps, particularly if the Chair is the only one in the thick of the negotiations. A pre-agreed communications strategy will help to manage this process.
Make sure correspondence with members ahead of PPF assessment clearly flags the risks and potential for scams on transferring assets out of the scheme. Your communications should help members understand the risks, the true value of giving up their pension and compensation that will be available from the PPF should they keep their funds invested in the scheme.
If the insolvency is high profile most information gets to members through media; engaging a PR consultant may be useful to make sure consistent information is released and help manage members’ concerns. Having a pre-prepared statement ahead of any announcement, and a regularly updated Frequently Asked Questions document, is essential.
In summary, a crisis can occur for a number of reasons but good contingency planning is key in ensuring that protections are in place and that every stakeholder has been considered. If you’ve not thought about this yet, remember it is never too early to start the planning process and determining whether support is required. The steps above should act as a helpful guide as you embark on this process.
This article was featured in Pensions Aspects magazine January edition.
Last update: 27 January 2021