Many underestimate the significant impact that defined benefits (DB) pension schemes can have on manufacturing companies. Pensions now influence every aspect of day-to-day corporate life.

The pensions arena in 2016 was defined by the outfall arising from Brexit, companies continuing to implement effective auto-enrolment strategies and the burden of ever-changing legislation. Further reforms and pressures are expected, the highlights of which are set out below.

BREXIT

A significant amount of pensions legislation originates from the European Union (EU), although as yet it is unclear to what extent the Great Repeal Bill will mirror EU law. Brexit opens up the opportunity for the UK Government to reconsider legislation, in particular aspects such as TUPE may be clarified. Notably, the scheme funding reforms contained within the IORP II Directive, that are currently anticipated to be implemented by 2018, may not apply in the UK.

Market volatility and heightened uncertainty have caused weaker predictions for growth and low yields in which risk-free assets are generating no or little returns. Consequently, some trustees saw their schemes' deficits worsen overnight, placing pressure on employers to repair these widening pension deficits.

This weakening in the employer covenant may mean that companies experience increased pressure from trustees for assurances, and employers must prepare for the possibility of an employer covenant assessment. Further, international companies considering corporate restructuring as a result of Brexit must pay close attention to the impact upon the employer covenant.

MANAGING RISK

There remain many DB schemes within the manufacturing sector, and whilst these may be closed to future accrual, they need to be managed.

Current economic uncertainty means that employers need a clear strategy for managing pension scheme funding in order to reduce their exposure to DB pension scheme risks, which can have a negative impact on share price. We have been discussing with clients ways in which their pension scheme liabilities can be managed.

Since the introduction of TPR, DB pension schemes have become increasingly important stakeholders in corporate transactions. A target with a pension scheme deficit can put significant constraints on the actions a potential buyer can take. Sponsoring employers considering a sale must satisfy themselves that there is little or no risk of being targeted by TPR by ensuring proper support for pension scheme liabilities.

Employers should also consider their Experian score in respect of the Pension Protection Fund (PPF) levy. We have been assisting clients to review their levy score and have made

recommendations of action which can be taken to reduce the levy. Those manufacturing companies that are able may benefit from considering a group company guarantee, which can provide a very significant reduction in the PPF levy.

GENERAL DATA PROTECTION REGULATION (GDPR)

As mentioned on page three, the GDPR will replace the Data Protection Act 1998 from 25 May 2018. The GDPR will have a considerable impact on the way that employers and pension schemes can lawfully collect, use and share information about members and the data held in respect of pension schemes by employers will need to be treated in line with the new regime.

Both employers and pension schemes should utilise 2017 to prepare for the GDPR. It will be necessary to review practices to establish whether amendments are required to any documentation such as contracts with third party administrators or practices, to ensure compliance in readiness for the GDPR. We have been carrying out audits for our clients in respect of their existing documentation.

UK: AUTO-ENROLMENT AND TPR

In December 2016, the DWP announced the broad scope of its planned 2017 review of the auto-enrolment process. This will cover a wide range of aspects including the scope of the regime, the appropriateness of earnings and age thresholds and the level of the charges cap. This may mean a change in the legislation, requiring a review of processes by employers. In addition, employers will have to continually monitor compliance with auto-enrolment procedures and ensure that contributions are being paid timely and effectively. The number of Compliance Notices issued by TPR has now reached over 26,000, demonstrating TPR's willingness to act.

ACTION POINTS

It will be no surprise that there is lots on the horizon. Actions which employers can take in order to prepare for any changes are:

  • consider the impact of Brexit on the employer covenant and whether any action needs to be taken in respect of funding support;
  • review the calculation of the PPF levy and consider whether any action can be taken to reduce this;
  • audit agreements with third parties to ensure compliance with GDPR; and
  • monitor auto-enrolment to ensure compliance and make changes where appropriate to incorporate new requirements.