TPR Distress Guidance

The Covid-19 pandemic has had a substantial impact upon the trading and profitability of many businesses across the UK. This has in turn affected the defined benefit pension schemes which these businesses support, with trustees increasingly likely to find their sponsoring employer experiencing financial distress. With this in mind, the Pensions Regulator (TPR) has issued new guidance for protecting schemes from corporate distress.

The guidance sets out the recommended priorities for schemes whose sponsors are at various stages of the corporate stress curve, ranging from the best practice integrated risk management (IRM) approach under ‘normal’ trading conditions to schemes where the sponsor is facing the prospect of insolvency. The Regulator’s priority remains that trustees should continue to take a proactive approach, and have plans in place to allow them to act quickly as economic impacts develop. Early engagement with sponsoring employers and advisors will help trustees to protect members from adverse scenarios.

Sponsors showing signs of financial distress

Trustees should be aware of indicators of financial distress, so that they are prepared to take appropriate action. These indicators may include, but are not limited to: cash flow constraints, credit downgrades, removal of trade credit insurance, disposal of profitable business units, and loss of key customer contracts.

The signs will vary between businesses and are dependent upon the industry that the sponsor operates in, therefore appropriate knowledge of the sponsor’s business is essential to good scheme governance.

Covenant monitoring and sponsor engagement also plays a crucial role in trustees’ ability to identify warning signs early and take appropriate action, with increased frequency and detail of covenant monitoring also being recommended should the employer show signs of distress.

In such situations, TPR sets out several recommended actions for trustees to take, including:

• Increasing frequency of covenant monitoring
• Performing a detailed review of the scheme’s position in the event of a hypothetical insolvency
• Reviewing the investment strategy to consider the level of supportable investment risk
• Understand the role of other stakeholders in a distressed scenario
• Ensuring sufficient information-sharing arrangements are in place
• Review corporate transactions and consider if they may be materially detrimental to the covenant supporting the scheme
• Ensure clear communication with members and alert them to the risk of scams should they seek transfers out of the scheme

In distressed scenarios, sponsor requests for deferment of deficit repair contributions (DRCs) may become more likely. If such requests are made, trustees should consider them against the framework set out by TPR in its guidance, as well as seeking appropriate professional advice.

Sponsor facing the prospect of insolvency

If a sponsor insolvency appears likely, trustees should seek appropriate professional advice prior to taking specific actions, in order to ensure that all options to protect the scheme’s position have been considered.

Trustees should also be familiar with PPF contingency planning guidance and take appropriate steps to prepare the scheme for PPF assessment and be familiar with guidance on restructuring, as well as TPR’s notifiable events regime.

Situations such as this can prove complex, and we believe, in line with regulatory guidance, that it is essential for trustees to seek professional advice to help navigate such circumstances appropriately.

Our view

The guidance set out by TPR serves to summarise and reinforce existing guidance on scheme management in a variety of situations. Such situations can be complex and independent professional advice becomes increasingly important during times of corporate distress. Even in cases where a sponsor is not facing financial challenges, appropriate covenant, actuarial, legal and investment advice allows trustees to understand potential challenges and means that a scheme can be prepared to act quickly should adverse circumstances arise.

In our experience through the pandemic, one of the main difficulties that trustees have faced is obtaining adequate information from sponsors due to a variety of factors, including limited management time, uncertainty resulting in delayed forecasts as well as sponsor reluctance to release adverse figures. Therefore, it is welcome that TPR has stressed this area in its guidance, and a reminder to sponsors of their legal duties regarding the disclosure of information may prove helpful for trustees.

TPR has released figures suggesting that only around 10% of sponsors have requested easements on contributions. However, we are still dealing with requests for extensions of easements, and it may be the case that Brexit coupled with a reduction in available liquidity as a result of the impact of the pandemic means that more requests occur next year. We believe that independent covenant advice is particularly important in such circumstances.

At PCS, our senior staff all have over ten years’ experience in providing covenant advice to schemes of various sizes in diverse situations. If you have any questions about this guidance or covenant matters in general, feel free to contact us and we can discuss how we can help you.