TPR paves way for three-month DB contribution holiday

Building on guidance a week earlier that a suspension or reduction in contributions to DB plans “may be appropriate” while sponsors struggle through the disruption, the watchdog said trustees now “should be open” to such requests.

The move came in response to calls from influential actuarial company Mercer, which urged the regulator to ease the nerves of trustees worried that they might face regulatory action if they moved to protect the sustainability of their employer’s business.

It gives breathing space to the most stressed cases to work out a longer-term solution while not authorising a free-for-all

Bob Scott, LCP

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, TPR cautioned.

In addition, the watchdog will allow trustees to delay submission of recovery plans by three months without pursuing enforcement action, and will not expect trustees who are close to completing their valuations to revisit their valuation assumptions.

Further guidance to come

Transfer value activity may also be suspended for three months if trustees judge members to be at risk of scams or unscrupulous advice, and defined contribution schemes should also “consider how individual members might react in the current environment to headline market/fund value falls or reduction/loss in earnings”.

David Fairs, executive director of policy at TPR, said: “The significant measures and clear guidance we are announcing reflect the unprecedented and challenging situation trustees and employers find themselves in.”

Mr Fairs said no rethink of the current regulatory system was necessary, given its existing flexibilities, but that the regulator stated the current scheme funding regime is flexible enough to cope with the impact of a severe economic downturn.

“However, we are actively considering what additional support and guidance we need to provide now so that those who manage and contribute to people’s savings can take the right steps to ensure adequate protection, recognising the challenging situation some scheme sponsors are in,” he said.

“We will continue take a reasonable, pragmatic and proportionate approach in the weeks and months ahead, and we call on trustees to follow the guidance closely to make well-balanced decisions.”

By only insisting that suspensions longer than three months follow the guidance it has previously issued, the regulator is effectively authorising a nationwide payment deferral for employers who do not pay dividends or allow other forms of covenant leakage.

Bob Scott, senior partner at consultancy LCP, said: “To my mind, it seems eminently sensible. It gives breathing space to the most stressed cases to work out a longer-term solution while not authorising a free-for-all.”

Dividends must stop

While the industry and regulators have proven keen to ensure that pensions do not lead to the collapse of UK companies, trustees and actuaries have warned sponsors that they will not be allowed to restructure their commitments unless dividends are wiped out first.

Those in charge of negotiating on behalf of scheme members confirm that many corporates are now asking to delay or cancel contributions, but say they will stand firm unless this forms part of a package of measures.

“It can’t just be the trustees who are getting pushback. Other people have to take a bit of pain as well,” said Peter Thompson, a professional trustee with Capital Cranfield. He said directors remuneration had also come under pressure in some circumstances.

“Some are asking for a deferral, some are asking for, in effect, a contribution holiday. Our question is, ‘OK, but what else are you doing?’” he said.

Charles Cowling, a partner at Mercer, agreed. “There should be equitable treatment between stakeholders. Certainly dividends [should be affected] but also other creditors.”