On the go: Three in four defined benefit schemes say they have taken no material action to change their investment strategies or journey plans as a result of Covid-19, but a new report from LCP warns that “inertia” could prove damaging.
LCP’s report does not discount that inaction may be reflective of schemes’ robust planning, but argues that now is a good time for schemes to take stock, and ensure they have the right strategy and planning in place.
A survey found that 40 per cent of respondents felt their funding and covenant positions were stable, while the remaining 60 per cent had seen either or both deteriorate during the pandemic.
Only 10 per cent of schemes needed to make use of the Pensions Regulator’s relaxed guidance, announced in March, on deferred contributions, and most made use of the full three-month period allowed for by that guidance.
However, 60 per cent agreed it is too soon to say whether government support has done enough to help scheme sponsors struggling as a result of the lockdown.
Last month, Pensions Expert reported on analysis by TPR that suggested deficit repair contributions would have to undergo a median increase of 75 per cent if schemes were to retain their existing recovery plan end dates.
In a blog post published Wednesday, TPR chief executive Charles Counsell drew attention to the fact that the regulator has “received 108 revised recovery plans. Of these, almost 86 per cent [92] have seen schemes agree to defer their employer’s deficit repair contributions (DRC) allowing some room for manoeuvre. The majority were from small schemes and relate to sectors under increased strain from the impact of COVID, such as the manufacturing, retail and airline industries.”
Mr Counsell warned that, with the rolling back of the furlough regime, “employers will continue to experience significant financial challenges and some, sadly, will fail.”
He highlighted a warning from the insolvency and restructuring group R3 that we may currently be in “the calm before the storm”, with Begbies Traynor predicting that more insolvencies could occur than resulted from the 2008 financial crash.
While stating that TPR will not be able to involve itself in every situation, Mr Counsell nonetheless said the regulator stands ready to empower “trustees through our guidance to have the right conversations at the right time, [so that] TPR can concentrate on areas of greatest risk and reduce any potential extra burden on trustees from a regulatory intervention.”
“Trustees should be open to reasonable requests from an employer in distress but must make an informed decision if it’s in members’ best interests to agree,” he wrote, and “[if] it is judged necessary and appropriate to suspend or reduce contributions from an employer experiencing financial distress, trustees should seek appropriate mitigations.”
In its report, LCP urged schemes to take a number of steps to prevent them “being buffeted by potential economic storms ahead and to put them in the best place for any regulatory changes.”
These include determining the destination of the scheme and keeping it under constant review; understanding covenant, investment and funding risks and how they might impact the long-term plan; looking for innovative solutions, possibly involving contingent assets; and building resilience in order that the negative impacts of future change be mitigated.
Jill Ampleford, LCP Partner and one of the authors of the report, said: “Since the regulator set the direction of travel towards long-term journey planning back in March, schemes have had to navigate unexpected choppy waters as a result of Covid-19.”
“We don’t know what the true economic fallout of the pandemic will be, so it’s understandable that schemes may want to simply batten down the hatches. However, schemes need to guard against inertia and instead make sure they have a robust journey plan.”
Mary Spencer, LCP Investment Partner and another of the report’s authors, added: “Schemes are expected to take account of a wide range of risks, including investment risk and the risk of the sponsor not being around in the future.”
“It is vital that schemes review the extent to which Covid-19 has changed these two key factors and revise their approach. More generally risks don’t stand still, so a scheme’s ability to adapt to change could make all the difference."
