TPR guidance on ‘employer distress’

by John Wilson   •  
Research

Overview 

New guidance from The Pensions Regulator (TPR) urges trustees of defined benefit (DB) pension schemes to prepare now in case their sponsoring employer faces financial difficulties. It sets out how trustees and employers should work together to make the right decisions for a pension scheme - monitoring the covenant and adopting an integrated risk management (IRM) approach, even if the employer is not currently in trouble. 

Key points 

  • All trustees should adopt a fully documented IRM approach to their scheme, with workable contingency plans and suitable triggers in place. 
  • Practising IRM will highlight problems early on, and the sooner trustees act, the greater the prospects of protecting the scheme’s position. Trustees should regularly review these risk management and governance procedures to make sure they are fit for purpose. 
  • Engaging regularly with the sponsor and with other creditors (where applicable) will help trustees to identify and manage key risks early on. 
  • If trustees delay putting robust scheme protections in place, other stakeholders, such as lenders, will be in a better position to exert control over and extract value from a distressed sponsor, potentially to the detriment of the scheme. 
  • Trustees should remain alert to pensions scams or unusual transfer activity and prepare a communications strategy to support members when they are facing uncertainty. 
  • If a sponsor is facing the prospect of insolvency, trustees should refer to the Pension Protection Fund (PPF)’s contingency planning guidance

Detail 

The guide is aimed at trustees and, very usefully, includes practical recommendations, case examples and a checklist to use during periods of sponsor distress.  

It begins by observing that “When sponsoring employers experience financial distress, actions taken by those employers as a result can lead to significant pension scheme losses. It is during these times that options available to protect savers and their pension schemes reduce as the sponsor moves along the stress curve towards insolvency”. As “the first line of defence for savers and their pension schemes,”, TPR expects that they will “remain alert, prepare, plan and [be] ready to act as the economic impact of global events develops”

The concept of a corporate stress curve is used to illustrate a hypothetical employer's downturn towards insolvency and highlights the steady decrease in options for trustees as a sponsor becomes more distressed. Moreover, it picks out strategies that trustees should focus on, depending on where their employer sits along the curve. 

The stress curve divides sponsors into three groups with recommendations for each group. Some key points are shown below (the guidance is much more detailed and includes links to relevant guidance such as clearance, notifiable events and protecting savers from scams).  

Group 

Best Practice 

Sponsor showing no signs of distress  

IRM processes in place 

Sponsor showing signs of distress 

Know the signs (see Annex 2 of the guidance) 

Understand the potential returns to the scheme in a theoretical insolvency 

Increased frequency of covenant monitoring and review investment strategy 

Understand the interests of other stakeholders (e.g. banks and other creditors) 

Distressed sponsor facing prospect of insolvency 

[The above, plus]  

Engage with the PPF 

Develop communication strategy for members 

Comment 

The guidance is very timely given the impact of Covid-19 (which is mentioned in the guidance) and the prospect of a material increase in insolvencies when government support schemes (such as furlough) end next year. A key message is that trustees should act now to ensure they are prepared for the risk of employer distress and have more protections or triggers in place to protect their schemes from any negative impact in the event the worst-case scenario materialises. Ideally, as a minimum, trustees should seek to ensure they are provided with early information that explains the deteriorating nature of their sponsor's performance, preferably before and not after stress turns into distress, enabling them to take advice and consider protective actions to avoid the risk of being placed last in the queue of creditors. 

Good advice is paramount so it is important to speak with specialists in this area. 

Further reading

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