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Protecting your scheme against sponsor distress

  • United Kingdom
  • Pensions


The Pensions Regulator (TPR) has published new guidance emphasising the need for defined benefit (DB) pension scheme trustees to put in place structures/information flows to allow them to spot employer financial distress early, and to have a seat at the table early in any employer restructuring/insolvency discussions.

The guidance is not just for schemes with employers in financial distress. It sets out TPR’s expectations on the best practice governance which all DB schemes should have in place. The concepts and steps outlined by TPR are not new. However, the latest guidance pulls together the strands from previous pieces of guidance, and provides a timely reminder of TPR’s expectations in this area. It also details the practical steps trustees should be taking now to manage the risks associated with financial distress further down the line.

Brief actions

Trustees should consider the recommendations in the guidance and assess their preparedness for a scenario where the scheme’s sponsor may encounter major financial distress (and whether any further action should be taken to improve this).

Trustees are expected to adopt a risk-based principles approach on an ongoing basis. In particular, they should:

  • Consider current arrangements and whether any current governance or risk management arrangements should be amended to incorporate TPR’s recommendations (e.g. understand the employer’s legal obligations to the scheme, the scheme’s risk register, crisis management plans and information sharing protocols). 
  • Evaluate the level of risk – e.g. is the sponsor showing signs of (or particularly sensitive to) the examples of financial distress highlighted by TPR, and what action can the trustees take to better understand the risk?
  • Have a plan of action – do the trustees have the necessary processes and advisers in place to respond properly to the issues that will arise where the sponsor is in major financial distress (e.g. managing scheme investments, responding to requests for financial easements, ensuring fair treatment against other stakeholder interests)?
  • Hope for the best, prepare for the worst and evaluate the scheme’s ability to act quickly in an insolvency scenario, and the scheme’s readiness for Pension Protection Fund assessment.

TPR has emphasised that where trustees take early action, the number of options available to improve the pension scheme’s position will be greater. Conversely, the longer trustees wait (and as the level of financial distress becomes deeper) fewer options will be available.

Some more detail

Pre-distress: integrated risk management

Even absent any prospect of short-term employer financial distress, the guidance recommends that trustees adopt (and follow) systems and processes which allow the trustees to spot emerging risks, and strengthen the scheme’s potential position and ability to react if financial distress occurs in the future. Such steps will already be familiar to many trustees (as examples of general good governance), and are summarised in the diagram below.

Risk of distress: spotting the signs

Aside from early monitoring, the guidance highlights some specific circumstances, which trustees should identify as the signs of financial distress. These include:

  • decline in trading performance
  • cash flow constraints
  • credit downgrades
  • removal of trade credit insurance
  • disposal of profitable business units, and
  • loss of key accounts/contracts.

In spotting these signs, trustees are expected to engage early with the scheme’s sponsor, and understand the ability of the sponsor to meet its obligations to the scheme alongside other stakeholders (such as the sponsor’s landlords, lenders, key customers, and other creditors).

Once financial distress has become apparent, the guidance stresses the need to perform specific and detailed reviews of:

  • the scheme’s position in a theoretical insolvency, including its expected returns on insolvency alongside other creditors
  • the scheme’s investment strategy, and in particular whether the current level of investment risk is supportable, and whether contingency plans are required in the event of a sudden deterioration in the covenant
  • the role of other stakeholder interests, particularly where such stakeholders may negotiate improvements in their own position, to the detriment of the scheme
  • any requests from the sponsor for easements to the current financial support provided to the scheme – detailed guidance has already been published in this area
  • whether the trustees can obtain any necessary information, such as trading information and details of ongoing liquidity
  • any proposed or completed corporate activity which has been triggered as a response to the distress, (e.g. taking on additional debt, providing further security to another creditor, or using proceeds from a disposal to satisfy existing debts). Annex three to the guidance provides detailed case examples on how such activity can affect pension schemes. In general, trustees should consider if such a transaction would cause a material detriment, and whether clearance may be required, and
  • whether it is necessary to communicate with members regarding the effects of the distress on their benefits and increases in requests for transfers (and the resulting risk of scams).

Ongoing distress: taking action on the prospect of insolvency

The final part of the guidance applies where a sponsor’s insolvency is looking likely. TPR considers that at this stage trustees should be taking professional advice on the options available to ensure that all options to protect the scheme can be explored.

Some specific points for consideration are summarised below:

  • Notifiable events – trustees should be aware of the notifiable events regime and when this imposes reporting obligations on the trustees and/or the sponsor.
  • Measures under the Corporate Insolvency and Governance Act (CIGA) – CIGA introduces a number of new procedures which may involve the trustees, including moratoriums on certain debts, and the ability to implement restructuring through a consensus of the sponsor’s creditors. Where such plans are proposed these are likely to be case specific and trustees should take specialist advice.
  • Enforcement of security – if trustees have security in place (such as guarantees), they should confirm that they can enforce that security should the need arise.
  • Process for entering the Pension Protection Fund (PPF) – trustees would need to be familiar with the PPF and the steps required to prepare the scheme for PPF assessment, such as implementing independent bank and payroll arrangements, realising charges and assets contingent on sponsor failure, accessing documents and data held by the sponsor, and compiling a full set of governance documents.


In the recent past, trustees might have considered insolvency or distress scenarios to be abstract concepts, which are either too remote to consider, or which might be interpreted by the sponsor as over-zealousness if raised. However, this TPR guidance reinforces the message that all trustees (not just those with employers in financial distress) should be reviewing their governance and risk frameworks to be able to react quickly and effectively if a distressed scenario arises.

Unfortunately, these types of scenarios (even if not leading to a full insolvency) are likely to become more prevalent, and the time to react may be short. Accordingly, it pays for trustees to be prepared, and for trustees and sponsors to have well defined and organised plans and processes in place.