The Covid-19 pandemic has had a devastating impact on many employers as well as many defined benefit pension schemes. Whilst employers in many industries have rightly been focussing on the immediate issue of continuing to trade and looking after their current employees in this challenging environment, trustees are required to continue to act in the best interests of the pension scheme members and this can often lead to conflicting agendas.

Significant shocks to financial markets across the globe have led to serious funding challenges for many schemes. Government bond yields have fallen and remain at record lows driving up pension scheme liabilities. At the same time, significant falls in growth markets over the early months of 2020 mean that pension scheme assets remain depressed for many despite relatively strong recoveries in some markets.

Unfortunately, the outlook for pension schemes in far from certain. We are a long way from knowing the overall impact of the Covid-19 pandemic and there are many political events on the horizon that will bring their own challenges. First and foremost in the minds of many in the UK will be the fast approaching end of the Brexit transition period which will undoubtedly cause significant short term issues for certain industries at the very least. Of particular concern is that some of the industries that have been most severely impacted by the Covid-19 pandemic such as transport, travel and hospitality are likely to be the ones who face some of the greatest Brexit challenges.

On top of all this, the current Pension Schemes Bill introduces a requirement for trustees to determine a long term objective for their funding and investment strategy, and a new funding code is due to be introduced shortly, leading to some of the most significant changes in actuarial valuations in many years. The new funding code will introduce two approaches for trustees to choose between: fast-track and bespoke.

The fast-track approach is expected to be fairly prescribed in nature and as a result the triennial valuations of schemes choosing this option will be subject to less scrutiny from the Pensions Regulator. Full details of the fast-track approach are yet to be published, however, the underlying actuarial assumptions will be significantly more prudent than the existing assumptions that many schemes are using. In isolation, this is likely to worsen funding positions and put further demand on already struggling companies to increase their deficit contributions.

The bespoke approach will allow trustees more flexibility in determining their funding assumptions and the recovery plan contributions, however, any deviations from the fast-track approach will have to be explained to the Pensions Regulator leading to extra costs which will certainly be unwelcome, particularly for smaller schemes.

So, with this unprecedented uncertainty, what should employers and trustees be thinking about both now and as they approach their next triennial valuation?

Pensions have always been, and for the vast majority of schemes continue to remain, a long term challenge and it is important that trustees remember this particularly in light of the recent market shocks. However, it is not sufficient to write off all of the recent volatility as a short term blip that a scheme can just ride out. The long term impacts of Covid-19 and Brexit cannot be predicted with any certainty and the new funding code will dramatically change actuarial valuations and recovery plans.

Trustees and employers should, therefore, focus on what they can control.

Some of the most impacted employers have already agreed with their pension scheme trustees to suspend or defer pension scheme contributions for a short period of time. It is reasonable for many trustees to agree to a contribution holiday, however, it is crucial that they seek professional advice before doing so.

Trustees should always monitor the strength of the employer covenant, but at this time, this has become more important than ever. Regular and open dialogue between both parties is crucial and trustees should consider taking independent professional advice on covenant.

The investment strategy should also be reviewed to ensure it continues to meet the long term funding objectives of the scheme and that the level of risk in the strategy can be supported by the employer covenant.

From a funding perspective, trustees and employers should ensure that they are aware of the changes introduced when the new funding code is published. It is likely that many schemes will need to amend their funding strategies as part of their next valuation.

Communication between trustees, sponsors and their respective advisers has become more important than ever. It is important that both sides understand and appreciate the objectives of both parties and are able to work together to achieve mutually beneficial outcomes which is still possible despite all of the challenges currently presenting themselves.