TPR launches trustee guidance on sponsor distress

The Pensions Regulator (TPR) has published guidance aimed at helping pension trustees protect defined benefit (DB) schemes from employer distress or insolvency.

It urges pension trustees to prepare for possible sponsor difficulties resulting from the Covid-19 pandemic and act quickly if they spot signs of distress from their employers.

The guidance also highlights possible issues arising from mergers and acquisitions (M&As), and Brexit.

TPR called on trustees to adopt a fully documented integrated risk management approach to their scheme, with contingency plans and triggers in place, to help highlight issues earlier, and keep it under review.

Trustees were also encouraged to regularly engage with their sponsor and other creditors to identify and manage key risks as early as possible.

The regulator warned that if trustees delayed putting these scheme protections in place, other stakeholders would be in a better position to exert control over distressed sponsors and extract value from them.

It urged trustees to be alert to possible pension scams or suspicious transfer activity and prepare a communications strategy to support members.

“When sponsoring employers experience financial distress or make business disposals it can cause significant risks to DB schemes and we know that sadly, in the current climate, some employers are struggling”, TPR director of supervision, Mike Birch, commented.

“The current environment is also leading to an increased level of corporate transactions, some of which are completed in response to distress.

“Trustees are the first line of defence for savers. The faster they act, the more options and greater time they’ll have to protect members’ retirements. Trustees should know the signs of distress, and preparations can be made before these signs appear.”

TPR called on trustees to understand the employer’s legal obligations to the scheme and the possible outcome for the scheme in the event of insolvency, and seek appropriate advice.

It provided a list of key warning signs that an employer may be in financial distress and urged trustees to increase the frequency of covenant monitoring in distressed scenarios.

If signs of distress are identified, the regulator emphasised the need for a detailed review of the scheme’s position and a review of the investment strategy, and the importance of understanding the role of other stakeholders and considering employer requests for scheme easements.

Birch added that trustees should monitor their employer’s trading and, where the employer needs to undergo restructuring or refinancing, or is making disposals, they should have open discussions with the employer and other stakeholders to ensure that the scheme is being treated fairly to protect the best interests of their members.

If trustees identify that a sponsor insolvency is likely, they were urged to take appropriate advice, familiarise themselves with the Pension Protection Fund’s (PPF’s) contingency planning guidance and understand what practical steps will need to be taken to prepare the scheme for PPF assessment.

Dalriada Trustees professional trustee, Sarah Ballantyne, said that ongoing monitoring of employer covenant has “never been more important” for protecting scheme outcomes.

“Engaging in early and collaborative discussions with the employer on its financial outlook, trading and liquidity position is key,” she added. “As is understanding the position being taken by a sponsor's lenders, and credit insurers.

“Preparation, quality advice and trustee experience can all improve member outcomes. Agreeing a monitoring framework in normal times will also serve in times of stress. We are clearly not in 'normal times' but the earlier issues are identified and addressed, the greater the prospect of improving the scheme outcome in times of corporate stress before they become distress.”

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