These uncertain times present unprecedented economic and operational challenges for pension schemes trustees and their advisers. Trustees must manage risk to schemes and their members by maintaining an open dialogue with sponsors, service providers and advisers, and focusing on securing and paying benefits.

At the time of writing, the Pensions Regulator (TPR) has published several key guidance notes which focus on actions for trustees of defined benefit (DB) arrangements and defined contribution (DC) arrangements and DB sponsors, and which cover areas including funding and administration. The clear message coming through from the collective guidance is that, whilst TPR does not encourage or condone a particular approach, it does expect trustees (and sponsors) to “do the right thing” for their situation and members within the existing parameters of the law. In this article we look at how this might translate into practice.

Above all, DB trustees must prioritise compliance with statutory obligations, carry on with business-as-usual procedures, and keep in regular and open contact with the sponsor, administrator, advisers and members.

• Prioritisation: TPR has stressed that prioritising key functions is not an excuse for systematic non-compliance. However, higher priorities at this time are likely to include continuation of pensioner payroll, putting new pensions into payment, responding to notifications of deaths and serious ill-health commutations.

Lower priority actions may include implementing transfer payments where there is still sufficient time remaining in the transfer window (see also “Transfers” below), any actions which are not attached to a statutory timeframe, and projects which do not have a fixed deadline.

• Trustee business continuity: consider the impact on scheme cashflows if certain investments or services are unavailable, and add any related risks to the risk register. How will you communicate with members; consider a statement on the scheme’s website (if you have one) or email footers, and work with administrators to prepare a script for discussions with anxious members. How will you conduct meetings validly and effectively whilst working remotely; you may wish to check your articles of association (in the case of sole corporate trustees) and/or any terms of reference allow you to hold meetings and make valid decisions remotely. Have clear systems in place to report to TPR immediately if you have any concerns about being able to pay benefits as they fall due or breaches of any other regulatory requirements.

• Administrator business continuity: trustees should assess administrators’ business continuity plans and confirm priorities in the event a high proportion of administrative staff takes time off due to sickness. How will functions such as collection of post be carried out? Will helplines remain open? Are there any payroll solutions that would allow pensions to be paid remotely? How will benefits be put into payment if beneficiaries cannot provide you with certified copies of verification documents? 

Be prepared to discuss and impose pragmatic solutions with your administrators to ensure benefits can be paid on time. Go back to basics; what are your business-as-usual administrative checks designed to achieve in the first place, and can this be replicated in another way? Recent guidance from the Pensions Administration Standards Association may assist.

Also be aware of the need to maintain member confidentiality and uphold compliance with data protection laws when implementing alternative processes remotely.

• Employer covenant: DB trustees should consider the impact of coronavirus on the sponsor and seek regular updates on the sponsor’s downside scenario planning, management’s view of the impact of the virus on the business, cash and liquidity, and trading, projections and contingency scenarios. Get the scheme’s covenant adviser involved at an early stage.

Trustees who are requested by their sponsors to suspend or defer deficit repair contributions (DRCs) should refer to TPR’s specific guidance in relation to corporate distress in response to COVID-19. The guidance sets out example questions for trustees to ask sponsors and principles to consider.

• Investment: trustees should speak to their investment adviser to ensure the scheme’s funding position by reference to market changes is factored into investment strategies or fund options. Trustees may wish to question the ongoing appropriateness of existing portfolios and consider the impact that current investments may have on the funding position or returns for members.

Be alert to the closure of certain funds e.g. property funds. DC trustees will need consider whether default arrangements will change because of fund closures and re-investments, including what will be needed to meet future monitoring and reporting requirements. 

Trustees of DC arrangements might consider communicating with members to provide reassurance following falls in fund values and, for some members, reduction or loss of earnings. There is a high risk of knee-jerk decisions (e.g. opting out, switching funds, transfers to scams promising higher returns) in response to the current situation which could present longer-term risk for those members. Encourage members to seek independent financial advice before making any decisions and highlight what the current market volatility might mean to different members depending on when they retire. 

Whilst perhaps not an immediate action, trustees might wish to take this opportunity to assess investment governance structures and the risk-profile and diversification of their portfolios and providers. 

• Valuations: DB trustees close to completing valuations now should speak with their actuary as soon as possible to determine if it would be in members’ best interests to proceed based on pre-pandemic assumptions. Trustees and sponsors should ensure discussions around post-valuation experience are transparent and take account of the sponsor’s longer-term ability to meet DRCs, considering any financial or operational difficulties caused by Covid-19. 

Whilst TPR cannot waive the 15-month statutory deadline to submit a valuation, it has said – for now - it will not take regulatory action in respect of a failure to submit. However, this is not a panacea and we recommend trustees seek professional advice as soon as possible if they are concerned that their scheme’s valuation may be affected. In addition, trustees hoping to take advantage of this temporary easement should still notify TPR that their submission will be late.

• Transfers: trustees may suspend transfer value quotations and payments without risk of regulatory action for the next 3 months. Again, this is not a “get out of jail free” card. In suspending transfer values, trustees will need to have clear reasons for doing so which are “in the best interests of their members” and will need to prioritise clear communication with affected members. Suspending transfer values beyond 30 June 2020 will require a breach notification to be submitted to TPR. Trustees should also be aware of an increased risk of members being targeted by opportunistic scammers and bolster due diligence processes accordingly. Speak to your legal advisers for best practice on how to navigate transfer requests during this time. 

If trustees are in the process of or thinking about a bulk annuity project, check that providers are comfortable to proceed given current market volatility. 

TPR recognises that these are extraordinarily testing times for many businesses. It encourages sponsors to be transparent with trustees and keep an audit trail of decisions and decision-making processes concerning your pension arrangement(s).

• Employer covenant: establish a regular channel of communication with your trustees and their covenant adviser and be ready to provide frequent updates on contingency planning and longer-term financial outlook. Help your trustees to help you with regard to your obligations to your pension arrangement(s).

• Pragmatism: TPR is prepared to be pragmatic. If you are asking your trustees to agree to a different funding arrangement due to the impact of Covid-19 (such as reducing or suspending DRCs, or implementing new security over assets), clearly document your justifications for doing so, ensure you present a longer-term plan to catch up with financial commitments to the pension scheme, and demonstrate that the scheme is being treated fairly as against other stakeholders. Spending time on the detail now is likely to assist in the coming months and years, particularly if TPR engagement is already or becomes a reality. 

The hints and tips outlined above provide a very broad overview of the types of considerations trustees and sponsors will need to think about now and in the weeks to come. Trustees and sponsors should speak to their professional advisers as soon as possible to ensure schemes continue to be run in compliance with the law and regulatory requirements in these exceptional times.