TPR issues guidance on protecting schemes from employer distress

Publishing its new stance on Thursday, the Pensions Regulator warned it could not intercede in all cases and that it is for trustees to ensure their systems are robust.

TPR’s guidance identified integrated risk management as key to trustees’ success in navigating the pandemic-related uncertainty, with workable contingency plans and suitable triggers vital if trustees are to spot and react early to problems with their sponsors.

“The sooner trustees act, the greater the prospects of protecting the scheme’s position,” the guidance stated.

A trustee board with the right mix of experience, structures and processes in place is more likely to make decisions effectively, manage scheme risks and protect the scheme

The Pensions Regulator

The corollary is that, should trustees not have systems in place to give them early warning of employer distress, they may allow other creditors, lenders and stakeholders to secure priority status for themselves in negotiations with the sponsor, potentially to the detriment of the scheme.

TPR’s definition of best practice integrated risk management includes trustees being familiar with the employer’s legal obligations to the scheme, and how those may play out in the event of insolvency. It also includes detailed risk management processes and frequent reviews of scheme governance, this last including the make-up of trustee boards.

“A trustee board with the right mix of experience, structures and processes in place is more likely to make decisions effectively, manage scheme risks and protect the scheme,” the guidance stated.

Covenant monitoring and seeking appropriate advice are likewise highlighted as key takeaways for trustees. Covenant monitoring should be increased in distressed scenarios, which should also lead to reviews of the scheme’s position, investment strategy and the role of other stakeholders, according to the regulator.

Trustees on alert as dark clouds gather

Pensions Expert has reported previously on the rising spate of profit warnings being issued as a result of the pandemic and the government’s lockdown policies. As reported in October, two-thirds of listed companies sponsoring defined benefit schemes had issued such warnings in 2020.

In light of this, Nita Tinn, chair of the Association of Professional Pension Trustees, told Pensions Expert that the APPT welcomed TPR’s new guidance, “which provides important and practical recommendations to help trustees of DB schemes identify and effectively plan for sponsor distress”.

She said: “In the current economic environment, it is more important than ever that trustees are prepared for the possibility of a sponsor experiencing financial stress and can take mitigating steps as early as possible to protect members.

“Having a plan in place and the tools needed to consider everything from risk management and scheme governance to member communications will be crucial.”

Akash Rooprai and Helen Frisby, directors at Independent Trustee Services, concurred. They told Pensions Expert that ensuring trustees have the right skills, experience and education to handle a wide range of possible scenarios, in particular insolvency scenarios, is of vital importance to scheme prospects.

“It is imperative for trustees to be fully conversant in this very complex area. Security changes, corporate activity and refinancing can happen very quickly, so trustees need to be on the front foot,” they said. 

“Experienced advisers and professional trustees with this experience and expertise are invaluable. Both can provide guidance, training, coaching and comfort to other trustees with less experience in these areas.”

Jo Myerson, trustee director at Ross Trustees, said that, where integrated risk management is concerned, covenant strength will always be the starting point in setting investment and funding targets. 

“The first thing is to be as clear as possible about which companies fall within the covenant, the strength of that covenant, where the risks to the covenant lie and what the likely recovery would be on an insolvency. Trustees can then build a strategy around that," she said.

“Triggers would ideally be agreed, formally or informally, with contingency plans if certain specified sponsor events arise.”

Preparedness determines insolvency outcome

Where a sponsor looks to be heading for insolvency, the level of preparedness on the part of the trustees will be crucial to determining the outcome of the scheme. 

Ms Myerson highlighted the importance of taking specialist advice to make sure all options for protecting the scheme’s position have been explored, while Ms Frisby and Mr Rooprai stressed the importance of trustees familiarising themselves with the Pension Protection Fund’s contingency planning guidance.

Richard Butcher, managing director at PTL, said that “most of the overall governance bits should already have been done” before the sponsor reaches the point of insolvency.

“An employer doesn’t go from good covenant to bust overnight,” he said. 

“During that process of degradation, you should be constantly adjusting your risk within the investment portfolio, so that if you do go over that final cliff edge, by then you've done pretty much what you need to do in terms of taking the risk out of the portfolio,” he continued.

“In terms of the overall governance picture, you should be pretty much there, but when it does happen one of the first things you have to do is tell your advisers, so that they can wade in and be armed and ready to react to whatever gets thrown at you.”

He added that, where jostling for position with other stakeholders is concerned, negotiations to secure high-priority status for the pension scheme should likewise already have been done. 

“If the company has gone bust, you’re too late to negotiate anything like that. You just have to take your place in the priority order.”

However, Mr Butcher said he was confident lessons learned during the previous lockdown would be carried over, especially as regards risk assessments and stress tests, which should “make the process of planning more robust”, albeit “it does mean you have to consider more scenarios”, he added.