TPR to allow temporary DRC and CETV suspensions

The Pensions Regulator (TPR) has confirmed easements for employers to suspend deficit repair contributions (DRCs) as part of its updated guidance on COVID-19.

The guidance, directed at sponsoring employers and trustees, also included a number of provisions around scheme valuations and transfer requests.

It also clarified repeatedly that TPR has no power to waive statutory duties, but that the regulator would make allowances in terms of its enforcement activity to provide easements for schemes amid the COVID-19 pandemic.

TPR has told trustees to be “open” to requests to reduce or suspend DRCs “in line with the principles set out in our guidance published 20 March”.

The regulator clarified: "Where sufficient information is not available to make a fully informed decision, trustees should, where appropriate, agree to requests to suspend or reduce DRCs for as limited a period as possible while appropriate information is being provided.

“Trustees will need to carefully consider any requests to suspend/reduce DRCs if they are expecting annual or substantial contributions (eg where a one-off, large, single payment is due or where DRCs are paid annually and the next one happens to fall in the suspension period).”

TPR emphasised however, that this period should be no longer than three months, with a condition of the agreement being a “full and ongoing provision of information” to allow trustees to closely monitor the employer covenant.

It also warned that particular care should be taken where DRCs in the proposed suspension window are "substantial".

Commenting on the updates, PLSA director of policy and research, Nigel Peaple, said: “TPR is right to say the current regime is sufficiently flexible to enable a short term easement of deficit recovery payments.

“At this very difficult time, it is reasonable for trustees, after undertaking the due diligence and scrutiny specified in the regulator’s guidance, to consider allowing the use of these flexibilities in the case of sponsoring employers that clearly cannot afford to pay them."

TPR also urged trustees to take legal and actuarial advice on whether a suspension or reduction is appropriate, and on the best method for the circumstances, to ensure that there are no unintended consequences, such as triggering wind-up.

PwC pensions partner, Paul Kitson, explained: "While this clarification from TPR will be welcome relief for many sponsors seeking to manage cash in the short term, it is not a free lunch.

"Deferring sponsor contributions will likely make the pension scheme cashflow negative.

"This may mean that the pension scheme has to sell assets to pay pensions while the market is depressed. Trustees and sponsors will have to carefully balance the need for retaining cash in the sponsor against the impact on the pension scheme.”

The guidance has also reiterated the increased risk of pension scams amid the crisis, following warnings that the pandemic had created the “perfect conditions” for scammers
and as ActionFraud reports a 400 per cent surge in COVID-19 related scams in March.

It stated: “Trustees should give greater attention to the heightened risk of members being
targeted by scammers and unscrupulous financial advisers.”

As such, the regulator has now given trustees discretion to suspend cash equivalent transfer value (CETV) quotations and payments.

Whilst usually this may mean a breach of disclosure requirements, TPR stated that it won’t take regulatory action in the next three months against trustees who suspend CETV activity.

Commenting on these allowances, Peaple added: “We wholly agree with the regulator that it is important that trustees do all they can to protect scheme members from the risk of being scammed after taking a DB transfer.

“It is very welcome that the regulator has made it clear that if schemes need to suspend transfer valuations or payments to protect savers from scams, it will not take action against the scheme for the resulting breach of regulations.”

Meanwhile, Hymans Robertson head of DB, Susan McIlvogue, highlighted that suspending CETV activity could help schemes manage cashflow needs, as well as easing the administrative burden and reducing pension scams.

"However," she adds, "it isn’t necessary for all schemes, particularly those better funded, more de-risked schemes that have been more insulated from the funding impact of covid-19."

The regulator has also included greater flexibilities for scheme valuations, which was highlighted as notably absent from previous guidance by industry experts.

TPR has stated that trustees will not be required to take post valuation experience into account, but that it expected them to consider it when agreeing recovery plans nonetheless, with a focus on whether DRCs are still affordable.

Trustees now also have discretion to delay their recovery plan submission by up to three months, as although TPR is unable to waive the statutory obligation, it has said that it won’t take regulatory action in respect of a failure to submit.

All of the measures are expected to be in place until 30 June 2020, although TPR stated that it would review this date, and whether further flexibilities or restrictions are required, “as matters progress”.

TPR also acknowledged that some trustees may decide to continue with the CETV suspension or delayed quotation "if this is still in the best interests of their members", adding that in this case, they must be clear on their reasoning and notify the regulator.

Although no statutory changes have been made to trustee or employer responsibilities, the regulator has confirmed that it will take a flexible approach to enforcement activity, with the updated guidance outlining these allowances.

The approach is in line with the “proportionate and risk-based approach” the regulator outlined earlier this month, with recent guidance on auto-enrolment contributions and late payment reporting following a similar route of enforcement changes, rather than statutory.

Commenting on the updates, PwC pensions partner, Paul Kitson, commented: "It's a sign of the times that we have further advice only a week after TPR issued its most recent update to trustees and sponsors."

Kitson added that the guidance hadn't addressed DC schemes in great detail, predicting that this could be an area where we see further detail in the coming weeks.

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