The impact of coronavirus (COVID-19) on pension scheme trustees, sponsors and members is already being felt.
In this time of uncertainty and upheaval, we have identified critical steps that trustees and employers can take now to help ensure the continued day-to-day operation of their pension schemes.
We also highlight some wider issues arising for pension schemes as a result of the sweeping effects of coronavirus on public health and the economy.
Trustee contingency planning
As an immediate step, all trustees of pension schemes should be putting in place a business continuity policy, or reviewing their existing one. The policy should set out how decisions and actions are to be taken by trustees during this period and contain information about any contingency arrangements in place.
A robust policy will address a range of legal and practical issues, including:
- options for taking time-critical decisions if the trustee board falls below its quorum;
- the appointment of an alternative chair;
- confirming whether the scheme's rules permit virtual board meetings;
- delegation of key functions; and
- contingency plans for advisers, service providers and professional trustees.
This will become a vital reference document for trustees and advisers as the situation develops, and will ensure decisions can be taken quickly and effectively.
Scheme funding and covenant
In light of the volatility in the financial markets, trustees should be taking urgent action to assess the impact on their scheme's funding, investments and employer covenant. This may include:
- engaging with investment and actuarial advisers and exploring
whether any protective measures can be taken;
- working with employers to understand the impact on their
business, including their ability to meet regular contribution
- considering the position of the scheme on employer insolvency
and reviewing security arrangements; and
- reviewing contractual buy-in or buy-out documentation. Insurers could have the ability to adjust price or even withdraw from the contract entirely in extreme circumstances. Capital adequacy and insurer covenant could also cause concern for trustees.
Members will understandably be concerned about their pensions, particularly those who are making important financial decisions or experiencing significant life events, such as retirement or bereavement. If member enquiries increase in volume at a time when there is significant strain on capacity, trustees and administrators will need to prioritise and consider the best means of communicating with members when traditional methods may be unavailable. A pre-emptive communication to members, highlighting the steps being taken by trustees, would offer reassurance to members and ease the pressure on points of contact.
Trustees may see more transfer requests as the value of liabilities rises sharply. A significant increase in scams has also been reported, with members concerned about their financial security being targeted, so trustees must remain vigilant.
Many businesses in the UK are under extreme pressure. Employers may wish to explore options for deferring or suspending pension contributions. Their ability to do so will depend on each scheme's trust deed and rules, and the degree of flexibility in the current recovery plan. Early and open communication with trustees will be essential.
The Pensions Regulator has acknowledged the strain on employers and said it will take "a proportionate and risk-based approach" towards enforcement. What this will mean in practice for individual schemes remains to be seen. TPR's ability to balance the protection of members (and the PPF) while supporting the sustainability of sponsors is likely to be tested in the coming months.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.