Trustees of defined benefit (DB) schemes must give careful consideration as to how contributions will be ‘switched on’ again when considering a potential delay in payments, Lane Clark and Peacock (LCP) has warned.

LCP partner, Steven Taylor, said that deciding whether or not to allow an initial deferral of deficit recovery contributions (DRC) is only part of the challenge, with previous guidance from The Pensions Regulator (TPR) indicating that part of this process also includes giving “serious consideration” to the mechanism through which the shortfall will be recovered.

Taylor stated that it was unlikely to be a “simple matter” of waiting for the next valuation and taking account of any missing contributions in any subsequent recovery plan, especially with the next valuation still years away for many schemes.

Taylor outlined a potential 'trigger' system, which would see any missed contributions reinstated when the company’s position improves, emphasising that this would also tie in especially well with TPR’s focus on treating pension schemes equitably.

The trigger system could potentially also include a requirement to pay contributions when free cash flow reaches an agreed level, or when the company starts making payments to other creditors.

While similar ideas were also seen in TPRs most recent Annual Funding Statement, Taylor clarified that it was particularly relevant when trustees are in the middle of deciding how to handle a request for deferral.

Taylor, added: “Most trustee boards will be sympathetic to a sponsor in difficulty who comes to them with a request to defer contributions.

“But they also have a duty to think hard about how contributions will be ‘switched on’ in future, and in particular about how they make sure that the pension fund is treated fairly if and when the position of the corporate improves.

“Contingent contribution arrangements that enable the scheme to get a fair share of the upside in company finances will need to be carefully designed but can help improve the long-term security of the scheme”

In addition, other industry experts have recently called on the government to allow DRCs to be deferred for up to six months, stating that this would provide "much needed capital" to businesses.

TPR recently confirmed that one in 10 sponsoring employers had requested a suspension in contributions so far, with further analysis revealing that these requests, whilst primarily for a period of three months, have ranged up to a year in duration.

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