Contingency planning for employer insolvency

While no one ever wants it to happen, dealing with the effects of employer insolvency can be a difficult and very challenging experience for trustees, and even more so for members.

It is often said “well that’s what the PPF is there for”, which is true. The PPF provides a valuable safety net for many in times of need. However, trustees also have a critical role to play in supporting members should the worst happen.

The latest PPF guidance sets out a number of steps to help trustees manage the risks of an employer insolvency event.

“It won’t happen to our scheme, we have a strong employer covenant”

For those who enjoy a strong covenant, good scheme governance is the key action, ensuring a complete set of scheme governing documents is summarised, available and easily accessible.

“Our covenant is not strong but it’s not weak either. Like most schemes it’s somewhere in-between”

In addition to good scheme governance, trustees need to understand the scheme’s dependency on the employer for the effective operation of the scheme. Who runs the payroll? If it is the employer, is there an agreement to document this? Is the scheme bank account with the same bank as the employer? Where is the scheme data held? The scheme administrator should be able to answer all these questions.

Having a clear understanding of the current position will allow trustees to address the key risk areas should things change. For more complex schemes with numerous employers over the years, as well as the governing documents, it is important to understand how all employers joined/exited the scheme.

“If our scheme has a weak employer covenant, what can we do?”

With an increasing risk or threat of an employer insolvency event, trustees should have a Contingency Plan in place to deal with such a scenario. The best Contingency Plan is the one that is locked away and never has to be used. However, the important step is to have thought through the potential issues and have such a plan in place. With the scheme governing documents and detailed employer history to hand, early engagement with the PPF can help speed up the PPF validation process post-insolvency. The sooner the PPF validates the scheme, the sooner the scheme can confirm to members they are eligible for PPF support and write to them with more details.

Any Contingency Plan should include a member communication strategy that covers ‘when’, ‘what’ and ‘how’. This will vary by scheme, but all should deal with the immediate post-insolvency queries, updates post PPF validation and the issue of formal member letters. These should be timely, clear, understandable and kept up to date with consistent messaging delivered through the scheme administrators and trustees, using electronic communication and social media as appropriate.

The Contingency Plan should provide a Q&A sheet to deal with the most likely questions and help provide prompt and immediate feedback on points of concern for members.

• Will my pension be paid next month?
• What is PPF assessment?
• Can I retire/transfer as normal?

From an operational perspective, the priority is to ensure the scheme can continue running the pensioner payroll, independent of the employer and that scheme data (both hard copy and electronic) is secure and accessible. Pensions will need to be cut back to PPF levels. Existing pensioners below Normal Retirement Age will be the first group impacted, so it is important to know which members are in this group and have a plan to communicate with them quickly.

The administration of a scheme in PPF assessment is different to ongoing scheme administration. The PPF will want to ensure a firm from their panel is appointed to the scheme. Early engagement with the PPF is helpful to plan and prepare for an orderly transition where required. The PPF guidance paper provides more detail on the above and other important areas for trustees to consider, encouraging early engagement with them to facilitate improved member outcomes.

Trustees cannot change the PPF compensation available to members, but they can play their part to help minimise disruption, whilst keeping members informed throughout what is often a challenging and stressful period. They should review the guidance paper and make a Contingency Plan appropriate to their scheme and employer covenant circumstances.