We quickly released guidance helping trustees, employers, scheme managers and savers navigate immediate challenges. But, six months on, it’s clear we’ll be dealing with the economic fallout for some time.

The pandemic will be challenging all scheme types, but here we’ll be focusing on the emerging issues facing Defined Benefit (DB) schemes.

We are committed to protecting savers and driving up governance standards. This is still at the heart of our work. But an altered environment needs an altered response. To help schemes weather the storm, our supervision teams have been busy engaging with DB trustees, sponsoring employers and administrators to address key risks.

Evolved response

We contacted schemes already subject to our Relationship Supervision to build a picture of their Covid-19 response. Initial conversations focused on ensuring core work – such as paying benefits – continued and we found business continuity plans had worked well.

We refocused our Relationship Supervision approach to meet emerging challenges. Where we would have reviewed every part of a scheme, we moved to concentrating on the areas at highest risk – such as the increased risk of an insolvent employer or a weakening covenant. This is temporary, and we will revert to our original approach when circumstances allow.

We have also increased our Rapid Response and Events Engagement teams, who manage situations of crystallising risk, including the impact of corporate distress or transactions on DB schemes. To do this, we temporarily paused our regulatory initiatives - targeted engagements on specific risks, for example equitable treatment of DB schemes against dividend payments, or investment governance. By targeting individual risks, we have been able to cover many schemes, regardless of size.

Despite the very positive results from these initiatives, we did not want to overburden trustees during the pandemic and wanted to free resources to support those schemes particularly hit by rising levels of corporate distress. This approach remains under review and we will return to these initiatives as soon as appropriate.

Approaching storm

Since March, we have received 108 revised recovery plans. Of these, almost 86% [92] have seen schemes agree to defer their employer’s Deficit Repair Contributions (DRC) allowing some room for manoeuvre. The majority were from small schemes and relate to sectors under increased strain from the impact of Covid, including manufacturing, retail and airline industries.

With the government’s Coronavirus Job Retention scheme ending in October, and other support being unwound, employers will continue to experience significant financial challenges and some, sadly, will fail. Despite figures showing that corporate insolvencies declined between April and May, insolvency and restructuring trade body R3 argue this is the “calm before the storm”. TPR expects more Covid-linked insolvencies in the autumn and during 2021, and more companies to be looking at restructuring. In these situations, trustees continue to be the first line of defence for savers.

With approximately 5,500 DB schemes, TPR cannot get involved in every situation which is why it’s so important trustees engage with employers early and effectively. This will help trustees understand the flexibilities that could be offered to distressed employers where

appropriate and how to structure support so it doesn’t disproportionately weaken their scheme.

Empowering trustees through our guidance to have the right conversations at the right time means TPR can concentrate on areas of greatest risk and reduce any potential extra burden on trustees from a regulatory intervention. Employers should, by this stage, be able to provide necessary financial information to inform trustees’ approaches.

Fair treatment in tough times

We know, long term, the best protection for a DB pension scheme is a strong, solvent employer who works with trustees to put the needs of the pension scheme on an equal footing to other business considerations.

As DB pension schemes are often a businesses’ largest unsecured creditor, trustees may be asked to support restructuring plans for struggling businesses. Trustees should be open to reasonable requests from an employer in distress but must make an informed decision if it’s in members’ best interests to agree..

If it is judged necessary and appropriate to suspend or reduce contributions from an employer experiencing financial distress, trustees should seek appropriate mitigations in line with our guidance.1

In restructuring situations, our supervision teams will expect trustees to have a robust plan, which may include bolstering the expertise of the trustee board and seeking professional advice. Trustees may need to look beyond their usual advisers and not be limited to just covenant advice but also on understanding their scheme’s position and options during restructuring and insolvency.

Trustees may be conflicted about their duty to members and desire to support a distressed sponsor. If this becomes difficult to manage, trustees should consider conflict management advice or bringing in independent trustees with restructuring experience.

Asking an employer to pay for advice at a time of financial distress may feel uncomfortable, but trustees will need a good understanding of their options if they are to support the business effectively without disproportionately disadvantaging their scheme.

Keeping clear records on decision making will also be important so they can demonstrate they obtained all the relevant information possible, took appropriate advice and made decisions in good faith and in accordance with scheme rules.

Keeping a struggling employer afloat should not come at any cost. For those DB schemes with an insolvent sponsor, savers will be protected the Pensions Protection Fund (PPF). However, TPR also has a statutory obligation to protect PPF. While the PPF plays a vital role in compensating pensioners where employers do fail, we need to minimise financial claims as they put a further burden on PPF levy payers – those companies (with DB schemes) that have not failed

Armed with robust financial information, good advice and guidance, trustees can manage the risks from a struggling sponsor and continue to act as the first line of defence. While TPR cannot solve all scheme problems and must focus resources in a strategic and risk-based manner, we stand ready to give trustees the tools needed to protect their members and, where appropriate, for the trustees to support a sponsoring employer without disproportionately weakening their scheme.