Freshfields Bruckhaus Deringer (Freshfields) has published further guidance for pension scheme trustees and sponsors, building on the recent Covid-19 regulatory and governmental updates.

The firm’s guidance builds on The Pensions Regulator's (TPR) updated Covid-19 guidance published last week, which included new easements around deficit reduction contributions (DRCs) and cash equivalent transfer value (CETV) regulatory activity.

Trustees now have discretion to suspend DRCs for up to three months, with the potential for an extension on this where appropriate.

This move was praised by Freshfields, who highlighted that pension scheme funding commitments often represent a “significant demand... that many companies cannot meet at present”.

It stated that the easements had signalled a relaxation in funding requirements for distressed employers, whilst also emphasising that trustees are subject to limits in the extent to which they can agree to a course of action.

Freshfields also praised the inclusion of an ‘emergency’ suspension of up to three months, emphasising that current circumstances meant some employers may struggle to provide trustees with all of the information needed to make a “rounded assessment".

It added that while the regulator's allowances included a provision around access of information, TPR would need to be "realistic" about the information that can be provided, and how forward-looking it will be, "given the level of market uncertainty".

However, the firm argued that for most schemes, a short-term suspension may simply buy time to negotiate and put in place longer-term measures, with the option to extend the initial three month suspension if appropriate.

It clarified that any extension should be supported by a business case, and ideally underwritten by any available productions.

This could require multi-party negotiations between the company, different lenders, and the pension scheme trustees, with further input from the regulator where appropriate.

Freshfields has also urged schemes to consider the position of the Pension Protection Fund, warning that the lifeboat has its own priorities and may not necessarily follow the approach outlined by TPR.

“However,” the guidance concluded, “provided the trustees are being treated equitably compared to other creditors and provided with mitigation (if appropriate) then we would expect most trustees to grant the sponsor additional flexibility in the circumstances given the easements outlined in TPR’s announcements.”

Suspending contributions to schemes open to future accrual is also an option under the easements introduced by TPR, although Freshfields emphasised that legal advice should be taken on the feasibility of this, adding that these requests “may raise more difficult legal issues”.

The guidance clarified: “It may be difficult for a trustee, from the perspective of seeking to comply with its legal duties, to permit continued accrual during a period in which future service contributions are not being paid, something which the scheme rules may not allow in any event.”

Sponsors should also carefully consider whether a suspension could inadvertently trigger winding-up provisions, or even a “nuclear option”, according to Freshfields.

The firm added that “pausing” future accrual, whilst often an option in normal circumstances, is likely not a viable option, a stance shared by the regulator.

Furthermore, while companies may be considering asking trustees to release security to increase financial capacity, this is again discouraged by the regulator.

Freshfields explained that this would also be a difficult decision for trustees, requiring detailed legal and financial advice to understand how the release of security will affect employer covenant, and where possible, some other form of mitigation from the employer.

It echoed the regulators recommendation that “whatever course of action is chosen”, employers and trustees alike should carefully document their decisions to help manage the risk of any future regulatory action.

“A proper documentary trail would also help sponsors to manage the risk of TPR seeking to use its moral hazard powers against the sponsor or its directors in future where it is alleged (with the benefit of hindsight) that the trustees were unfairly pressed into agreeing a reduction or suspension of contributions or other actions which may adversely impact the employer covenant supporting the scheme,” the firm concluded.

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