16% of DB schemes say Covid-19 has weakened sponsors' long-term covenant

Just 16 per cent of defined benefit (DB) pension schemes believe that the coronavirus pandemic has weakened their sponsoring employer’s ability to stand behind the scheme in the long term, according to a survey by Willis Towers Watson (WTW).

Additionally, the firm found that 35 per cent of the 129 DB schemes surveyed reported a negative short-term impact on the employer covenant.

Despite this, over two-thirds (64 per cent) of trustees expect to reach their current long-term objective in no more than nine years, although just 28 per cent of corporates thought this seemed likely.

WTW head of funding, Graham McLean, noted that the findings were "less gloomy" than might have been feared, with most schemes believing they have got through the first phase of the pandemic with the employer covenant "more or less intact".

He continued: “The Pensions Regulator (TPR) also said last week that fewer employers had deferred deficit contributions in response to severe cash constraints than had been expected.

“But a meaningful proportion of schemes fear that, although the economic consequences of the coronavirus have not been fatal for their sponsor, they have done lasting damage to its financial health.

“Schemes whose covenant is looking shakier may re-evaluate their strategies for ensuring that members’ benefits get paid.

“Some who expected to buy out benefits with an insurer or run the scheme off themselves may explore whether to ‘cash in the covenant’ while they still can and move to a commercial consolidator."

McLean explained that the disparity between trustee and corporate attitudes should not reflect different view on how funding positions have been affected by market conditions, as tracking tools leave "little room" for surprises.

He clarified, however, that this may instead suggest that trustees and corporates will enter the next round of negotiations "further apart than they have been for many years", stressing that creative solutions will need to be explore to find common ground.

Indeed, WTW's survey found that over a quarter (28 per cent) of pension schemes expected deficit contributions to rise following their next funding agreement.

In addition to this, more than half (54 per cent) of respondents thought that the new funding approach being prepared by TPR will ultimately cause employers to pay more.

Both trustees and corporate respondents also agreed that schemes should only have to demonstrate a bespoke agreement is suitable and complies with legislation, rather than being equivalent to a prescribed standard, with 72 per cent and 69 per cent of each subset agreeing respectively.

McLean clarified that the government has never said clearly that it intends the new funding regime to increase cash demands on employers in aggregate.

However, he noted that TPR's indicative blueprint would make "many employers" pay more if they wanted to pursue the 'fast track' route.

He continued: “There will, though, be another consultation before details such as maximum recovery plan lengths are firmed up, and the regulator has said this will reflect economic circumstances.

“The regulator’s usual balancing act may have got harder than ever, as it tries to shore up members’ benefits without impeding business recovery.

“This year’s events underline how hard it is to set robust ‘fast track’ criteria that do not need updating almost continuously.

“Reducing the evaluation of funding agreements to a comparison against this yardstick would also be at odds with the unique, nuanced and multidimensional nature of each scheme’s circumstances.”

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