Comments from Laura McLaren, Partner, Hymans Robertson: “Many companies will welcome today’s guidance from the Regulator announcing the continued flexibility to suspend pension contributions. Although the immediate crisis is starting to pass and lockdown is beginning to be relaxed, recovery is unlikely to happen quickly. Inevitably this means requests for short term relief from pension contributions are likely to continue from those companies within the industries hardest hit.
“However, things may get worse before they get better. Whilst the guidance offers some more breathing space, respite will be temporary. With a clear message that short term suspensions should not roll on indefinitely, come October, companies could be faced with no more furlough support and the choice of re-commencing existing pension contributions or triggering an out-of-cycle valuation. For those cases most in need of easement this prospect will loom large. Ultimately, we may see more distress cases and restructurings, some of which are likely to involve significant pension liabilities.
“Against a backdrop of so much uncertainty, trustees will be apprehensive about companies putting off contributions which they could still afford and exposing members’ benefits to unnecessary risk. A welcome aspect to the latest guidance is that the Regulator is becoming increasingly explicit over the conditions that must apply where contributions are being deferred. The overriding message is clear; schemes should be treated fairly compared to other stakeholders.
“Trustees should work with employers to find appropriate mitigations. As companies look for different ways to preserve cash we can expect to see more funding plans including ‘upside sharing’ mechanisms – to ratchet up cash when trading/conditions return to normal – with downside triggers and protections, such as security over assets, being needed to deliver improved member security.”
Wayne Segers, Partner at XPS Pensions said, “The economic impact of the necessary response to COVID-19 is likely to affect employers and pension schemes for a while yet. The Pensions Regulator has highlighted this in extending measures, but expects trustees to carry out more due diligence than before – especially when agreeing to reduce cash contributions. This may reflect an expectation that trustees should now have adapted to managing schemes in a COVID-19 world.”
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