The Pension Protection Fund has published guidance for trustees on contingency planning for employer insolvency. The guidance sets out the “simple but effective” steps that trustees can take “to mitigate some of the risks resulting from employer distress, particularly those areas which affect members and risk delaying completion” of an assessment period. These steps can be taken by trustees at any time, even if the prospect of their employer’s insolvency is remote. In terms of taking action to protect members, the guidance contains a reminder that employer insolvency is a time when members are most likely to need reassurance that their pension is safe.
The PPF recommends that trustees take steps in five key areas:
1. Governing documents
What is the issue? When an employer becomes insolvent, the PPF and its specialist advisers will need access to the scheme’s governing documents.
What should trustees do? Trustees should make sure they will be able to provide the scheme’s governing documents to the PPF. They should list and collate all documents, and arrange for them to be held in more than one place.
2. Payroll and banking
What is the issue? When an employer becomes insolvent, the pensioner payroll function will be at risk if it is carried out in-house by the employer. The trustee bank account could also be frozen if it is operated on the employer’s online banking platform.
What should trustees do? Trustees should make sure they have access to pensioner payroll information. If insolvency looks imminent, trustees should also consider setting up an account outside of the employer’s online platform and holding three months’ payroll in that account.
3. Review of employers
What is the issue? When an employer becomes insolvent, the PPF will need to know the history of the scheme’s employers, including how they joined and left the scheme and whether debts were triggered and paid when employers left. If it does not have this information, the PPF will not be able to confirm whether all members are eligible for PPF compensation.
What should trustees do? Trustees should make sure they have a record of these points. They need to understand which employers are still involved with the scheme and which members are connected to those employers.
4. Documents and electronic data
What is the issue? When an employer becomes insolvent, the PPF will need access to scheme documents and member files. It can be very difficult to get access if these are stored at the employer’s office or on the employer’s electronic network.
What should trustees do? Trustees should, for example, make sure there is a second record of scheme documents and that a back-up of any electronic data held on the employer’s network is maintained. One option might be to ask for help from the / a third party scheme administrator, to help to ensure compliance with the GDPR.
5. Charges and contingent assets
What is the issue? When an employer becomes insolvent, the trustees will need to give details of any charges or contingent assets to the PPF, which will assume the trustees’ creditor rights.
What should trustees do? Trustees should understand what charges and contingent assets are available to them on insolvency, and make sure they will be ready to hand all relevant documentation to the PPF immediately after an insolvency event.
Further points to consider
The PPF also suggests some other areas which trustees may need to consider:
- Do the trustees and / or their advisers have experience and expertise in managing a pension scheme in circumstances where the employer might become insolvent? For example, do they have experience of Regulated Apportionment Arrangements, Company Voluntary Arrangements and the PPF? If not, they should consider appointing an independent trustee or other advisers with this expertise. To assist the trustees in making appointments, the PPF has set up a panel of PPF specialists with the experience and expertise trustees need, including independent trustee firms, administrators, actuaries, auditors and lawyers. Further details on the PPF specialist trustees and advisers are here.
- Do the trustees have sufficient governance arrangements in place to deal with any conflicts of interest that might arise on insolvency?
- Members need to be “told what is happening promptly then kept up to date with accurate, clear and understandable information and communications“. Are the trustees ready to do this? Is member data accurate, and do the trustees hold a current address for every member?
- Do the trustees need help with a media strategy?
- How will the trustees make sure that they provide appropriate support to members who consider taking a transfer of their benefits? Trustees should work with the Pensions Regulator “to provide appropriate support … in the context of a stressed or distressed employer, or a restructuring exercise“.
- How will the trustees manage the scheme’s cashflow? Trustees should make sure that there are “clear mechanisms for disinvestment, taking into account the expected outgoings in the weeks or months ahead“.
The Pensions Regulator has endorsed this guidance, saying that it “highlights the need for trustees to maintain the high standards of governance and administration” it expects, “even during unexpected situations such as employer insolvency or a loss of infrastructure“. For trustees, the guidance provides a helpful insight into what they will need to do and provide to the PPF if the employer suffers an insolvency event; and what action they can take to prepare for that risk. Several of the recommended actions will be ‘easy wins’ for trustees. All trustees should read the guidance. Some trustees will need to take all of the suggested steps now. Others will need to be aware of them and might like to think about whether there are simple changes they can make now, which would help to reduce the amount of work needed if the risk of their employer’s insolvency increases.