The Pensions Regulator (tPR) recently updated its guidance on sponsor distress (the Guidance) with the update aimed at trustees of defined benefit (DB) schemes. It calls upon trustees to look out for signs of impact on sponsoring employers’ abilities to support schemes in the current challenging economic climate. The Guidance also acts as a warning to sponsoring employers that trustees may be likely to increase their monitoring of the employer covenant and/or call for additional support where there are potential signs of financial distress.

Legal obligations to the scheme

Trustees are reminded to consider who has legal obligations to the scheme in the Guidance and, in particular, to consider the employer’s obligations under governing documentation and legislation. Where necessary, trustees are encouraged to seek legal advice on this and to ensure a good understanding of factors such as a scheme’s funding position, including the size of any deficit on an ongoing funding and solvency basis.

Potential distress warning signs

TPR highlights key warning signs of employer financial distress in the Guidance, including:

  • cash flow constraints;
  • credit downgrades;
  • removal of trade credit insurance;
  • disposal of profitable business units; and
  • loss of a key customer contract.

The Guidance suggests that where these warning signs are present, trustees should increase the frequency of monitoring and perform detailed reviews of the scheme’s position. When an employer requests easements, such as releasing scheme security, trustees are reminded to check the scheme rules and to seek legal advice.

Integrated risk management (IRM)

The Guidance reminds trustees that IRM is an important tool for managing the risks associated with scheme funding and forms an important part of good governance. The DB funding code (which we looked at in our previous blog) sets out the importance of trustees adopting an integrated approach to risk management. It also provides a basic framework for doing so, focusing on documented and workable contingency plans to mitigate risks.

Communicating with savers in distressed scenarios

If an employer is experiencing financial difficulty, it might be reported in the public domain or visible to employees, causing savers to worry about whether their pension is safe. The Guidance encourages trustees to communicate with savers in such situations to make sure they understand the protections in place and the steps that are being taken in order to alleviate these concerns. Employers may benefit by working with the trustees (if possible) to draft member communications in such situations.

Notifiable events

The Guidance reminds trustees and employers that some insolvency events must be notified to tPR. This enables tPR to assist before a scheme enters a PPF assessment period and there are criminal sanctions available to tPR for those who knowingly or recklessly provide tPR with information that is false or misleading in a material way when complying with the notifiable events requirements.