DB employers mandated to justify further payment holidays

The regulator published on Tuesday an update to its guidance for DB trustees, where it states that contribution suspensions may continue to remain appropriate to support employers navigating the challenges resulting from Covid-19.

However, trustees are now asked to resume reporting certain key information to TPR “to ensure risks are being managed and savers protected”.

At the end of March, the watchdog launched new guidance aimed at helping employers freeze their DB obligations for three months in response to the economic fallout from coronavirus.

While it is right that the regulator is trying not to overburden trustees with reporting requirements, it is surprising that systematic data on delayed deficit payments and the like has not been collected until now

Steve Webb, LCP

At the time, TPR cautioned that suspensions should not be longer than three months without trustees receiving concrete evidence that the restructuring is necessary and being applied to other creditors and stakeholders.

Reporting rules coming in next month

From July 1, schemes will need to submit a revised recovery plan or a report of missed contributions if the deficit payment was suspended or reduced. Trustees will also have to report if the scheme has a late valuation and a recovery plan not agreed, and if there are delays in cash equivalent transfer value quotations and payments.

According to Charles Counsell, TPR’s chief executive, the regulator is determined to help where it can by “taking a pragmatic approach while remaining focused on the need to protect savers”.

“In making decisions on regulatory action, we will continue to do so on a case-by-case basis and take a flexible and pragmatic approach where breaches are Covid-19-related. As such, we feel the resumption of some reporting is now important,” he said.

Steve Webb, former pensions minister and partner at LCP, said reporting should have been implemented from the outset.

“While it is right that the regulator is trying not to overburden trustees with reporting requirements, it is surprising that systematic data on delayed deficit payments and the like has not been collected until now,” he said. 

“Good policymaking in the midst of a crisis requires up-to-date information on what is happening on the ground, and it is vital that policymakers obtain that information promptly.”

However, not everyone agrees with this view. David Brooks, technical director at Broadstone, argued that the lack of a reporting demand is not significant, since most trustees would have informed the regulator. “Our view is that it is wise to tell TPR anyway, even if they didn’t demand it,” he said.

Mike Smedley, partner at Isio, noted that even if trustees had reported the deficit payment holidays to the watchdog, the “regulator wouldn’t know what to do with the reports anyway – they don’t have the bandwidth to investigate every single case”.

Tougher decisions for trustees

Despite considering that deficit repayment contribution suspensions may continue to be necessary, it will be more difficult for trustees to approve these agreements.

“In view of the improved visibility of employers’ financial situations, we do not expect trustees to unquestioningly extend their original suspension arrangements on a three-month rolling basis based on limited information and for this to become the new normal,” the guidance read.

“Instead, we now expect that most trustees will be able to undertake due diligence on the employer’s financial position before agreeing a new suspension or reduction.”

Since the beginning of the easement measures, around 10 per cent of DB schemes have sought to defer DRCs, with discussions ongoing for others, the regulator noted.

Despite the increase in due diligence on these arrangements, Mr Smedley is expecting this number to increase.

“Those 10 per cent that already suspended DRCs were very seriously impacted by Covid-19, and I doubt that any of those sponsors is suddenly back to business as usual, so they will have to continue,” he said.

“I think we will get some new companies needing to suspend or reduce contributions because they’ve now got a clearer longer-term look. Maybe they only pay contributions quarterly or once a year, so the question hasn’t arisen yet.”

TPR also expects trustees to have greater insight into an employer’s short-term liquidity, and to consider discussions with lenders and other creditors when approving a deficit payment holiday.

It explained that given the timing of the start of business restrictions and closures due to the pandemic, employer loan and banking covenant tests at March 31 are unlikely to have been adversely affected. However, covenant tests ending in June and future tests may have been significantly impacted, which could “result in funders seeking increased protections from employers and lead to further requests of trustees”.

Mr Smedley added: “TPR is warning trustees to be very alert to what banks are doing and asking for, and effectively making sure that the company isn’t restructured or a bank doesn’t come to it and take security to the detriment of the scheme.

“There is quite a lot of pressure for trustees to be alert and alive to those things and to make sure they’re protected.”