COVID-19 and Pensions: First Aid Kit For Employers & Trustees
Mar 20, 2020
With the COVID-19 pandemic causing a significant global slowdown in economic activity and a severe effect on the financial markets, we briefly analyse some of the key issues that will need to be addressed by pension scheme trustees and employers in the coming weeks and months.
In order to ensure the pension scheme is in the best position to navigate the current crisis and take advantage of the inevitable post-crisis bounce it is vital that effective communication is maintained at all times between sponsoring employers, trustees, administrators, professional advisors and scheme members. Though the Pensions Authority has yet to issue guidance, it is expected that, when it does so, it is likely to echo some of the recommendations made by the Pensions Regulator and the PPF in the UK.
Assessing the impact of the crisis
COVID-19 Impact On
Considerations for Trustees
Trustee Meetings & Communication with Employers and Professional Advisors
The scheme trust deed & rules will, generally, set out the formal requirements for convening trustee meetings. It may be prudent, depending on the urgency or the matter under discussion, to dispense with prolonged notice periods by agreement between the trustees where the trust deed allows. For social distancing purposes, it will be necessary for trustee meetings to be convened by way of telephone or video-conference.
Trustee meeting formalities, such as a requirement for a specific quorum and the decision-making process should be reviewed with a view to ensuring that the trustees can continue to function without requiring any amendment to the scheme governing documents.
Though the Pensions Authority has yet to provide guidance or indicate areas where flexibility will be provided, the UK Pensions Regulator has stated that trustees should ensure that they have appropriate monitoring and contingency plans in place and should be cognisant of the risks posed by COVID-19 that are likely to have consequences for scheme members.
It is advisable that trustees stay in close contact with a representative(s) of the sponsoring employer’s board to understand how its business continuity plan (BCP) is being managed and to consider any significant decisions made by the employer that are likely to have an immediate impact on members. This may occur, for instance, where an employer chooses to make a change to pensionable salaries. It may also be necessary to discuss the likely impact on the employer’s covenant. Remaining appraised of the employer’s BCP is an absolute necessity for trustees of schemes where the employer company operates in the transport, tourism and hospitality industries.
As well as understanding the employer’s BCP, it is advisable that trustees understand those of the scheme’s service providers, such as those of the legal, audit and actuarial advisors, as well as the BCP of the scheme’s registered administrator. There is no doubt that the slowdown in business activity and client instruction will put a significant strain on the ability of smaller firms to remain fully operational. Where trustees are informed by a service provider that there is likely to be a gap in service continuity it would be advisable to quickly communicate this to members, ideally providing a notice period as well.
Once the employer’s BCP has been communicated to trustees, a reduction or deferral of the employer’s contribution may be necessary, especially where the employer has not discounted insolvency.
A defined benefit (DB) scheme funding holiday is generally only available if agreed with the trustees who will take advice from the scheme actuary. In the absence of any overriding emergency legislation or advice from the Pensions Authority, such a contribution holiday can only occur if permitted under the scheme’s governing documentation. Where any such proposal is made, trustees will need to obtain actuarial advice and in most cases, legal advice as well. Where an employer insolvency event has commenced, trustees and their advisors should have electronic access to all scheme documentation to ascertain what powers are available to trustees. It is imperative in these circumstances that trustees and employers receive legal advice on the available options as quickly as possible.
For defined contribution (DC) schemes, it may be possible for employers to reduce or suspend their contributions, though this will depend on the contractual arrangement with employees and the contents of the scheme’s trust deed and rules. There are also statutory time limits to be considered that apply to the remittance of both employer and employee contributions. If there is an issue with service continuity, in the case of an impacted third party or service provider, then an employer may not be in a position to ensure compliance with legislation. Where concerns such as this are identified legal advice should be sought as quickly as possible in order to identify all possible solutions.
Where a DB scheme employer is likely to fail in meeting its funding obligations then an immediate conference call/video conference should be convened with the trustees, the scheme actuary and the legal advisors.
Scheme documentation will need to be reviewed with a particular emphasis on wind-up triggers. It may be necessary for the employer to consider alternative options where the business does not have the required cash-flow to meet the obligation. Consideration may be given to the provision of an employer guarantee or the inclusion in funding arrangements of a contingent asset.
During the credit crisis, the Pensions Authority granted additional time for DB funding proposals and it was instructed by the Department to deal as flexibly as possible with applications for approval of funding plans. It is possible that similar allowances will be made in the wake of the COVID-19 pandemic though as yet there has been no guidance from the Pensions Authority on this point.
Given the impact that COVID-19 has had on financial markets, trustees should contact the scheme investment advisers and seek advice on what adjustments, if any, should be made to best cater for the current situation. Trustees might consider allowing for a re-balancing of the scheme’s investment portfolio and for further risk assessments to be undertaken with investment advisors.
The credit crisis highlighted the problems caused when trustees make unilateral “knee-jerk” investment decisions in the midst of a crisis. Cool heads and well informed investment decisions are required to best protect scheme members. It is one thing to be hammered by a down turn but it is another thing altogether to miss out on the subsequent up turn.
Many schemes have recently adopted ESG investment principles. A discussion with investment advisors will inform trustees as to whether they should abide by these principles or if a traditional investment strategy is more appropriate during this volatile period. It could well be that a strategy incorporating ESG objectives is the perfect fit for these turbulent times but suitable professional advice should be obtained and the question asked.
A communication to members should be issued where delays in fund/investment switching requests or transfer value requests is anticipated.
In any event the trustees should consider issuing a communication to members reassuring them during this time of confusion and re-iterating the emails and telephone numbers of the advisors best placed to answer any queries that they may have.
Death In Service Benefits
Where the pension scheme's death benefit is provided through an insurance policy, the trustees should check to see if the policy is impacted by a pandemic and whether it contains an “event limit” clause. Immediate clarification should be obtained from insurers on any relevant restrictions that may exist on the policies through which the protection is provided.
Where trustees issue a communication to members it may be prudent to include, in the most sensitive manner possible, a reminder for members to submit or update letter of wishes for their death in service benefit if they have not already done so. The trustees should also make themselves aware of the location of existing letters of wishes and confirm with the scheme administrators that these are also stored electronically on a member’s file.
During the COVID-19 pandemic and the economic slowdown that has only begun, it is imperative that trustees communicate regularly with one another, the sponsoring employer, the scheme actuary, scheme administrators and professional advisors. Employer BCPs will continue to evolve over the coming months, especially as the duration of the pandemic is still unknown. In this environment, potential issues should be identified as quickly as possible and where there is doubt, advice should quickly be sought from the scheme’s professional advisors.
The credit crisis highlighted how timely action can save schemes whereas inaction can lead to financial pain for employers and members alike. Employers will no doubt have critical business decisions to make in the weeks and months ahead but pensions should not be forgotten in any such decisions, as to do so could have financial repercussions that may well jeopardise any future recovery.
For expert advice on the likely impact of the COVID-19 pandemic on your business or scheme, contact a member of our Pensions team.