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Coronavirus - The Pensions Regulator’s guidance on COVID-19 - UK

  • United Kingdom
  • Coronavirus - Regulatory issues
  • Pensions

31-03-2020

The Pensions Regulator recognises that these are “unprecedented times” and that trustees and employers are facing significant and complex challenges across a range of issues including administration, investment, funding and employer covenant.

To this end, it has issued 5 sets of guidance highlighting things that trustees and employers can do to manage the current crisis: more is expected over the next few weeks.

The guidance is designed to support trustees and employers. However, it does not replace scheme rules or legal obligations - any decisions must still take the wider legal framework into account. The Regulator is also clear that it is not ”authorising, encouraging or compelling a particular course of action”. So, trustees and employers need to consider their particular situation when deciding what the right thing to do is.

Pensions Regulator COVID-19 guidance – what do you need to know?

The guidance highlights the Regulator’s current regulatory approach and key points to be aware of are:

  • valuation and recovery plans can be submitted up to three months late
  • valuation assumptions do not need to be revisited
  • depending on circumstances, deficit repair contributions (DRCs) can be suspended for up to three months (or longer where trustees have more information)
  • transfers can be suspended for up to three months
  • trustees should prioritise key administrative tasks but there is an acknowledgement that other tasks may be delayed

What’s the detail in the Pensions Regulator guidance?

DB funding

The Regulator has issued separate funding guidance for trustees and employers and has said that further guidance is coming in the Annual Funding Statement due after Easter.

Schemes completing valuations now: Trustees close to completing valuations do not need to revisit assumptions or take into account post valuation experience. However, they should consider the current position when agreeing recovery plans and whether DRCs are still affordable. If trustees need more time to consider the situation, they may decide to delay the submission of their valuation and/or recovery plan to the Regulator by up to three months.

Employers in difficulties: The Regulator has issued separate guidance for trustees where employers might be struggling financially. This sets out the issues that they should look at to determine the covenant strength of the employer before making any decisions. Factors to consider include the position of lenders, demand for products, supply issues and whether employers are proposing to make use of the Government’s support mechanisms. The key message is that trustees should ensure that they are treated fairly when compared with other creditors.

Requests from employers: The Regulator says trustees should be open to requests to reduce or suspend DRCs. Where sufficient information is not available to determine the employer’s financial position, trustees should agree to a suspension/reduction for as short a period as possible and for no more than three months. Trustees can agree to a longer period when they have all relevant information but this should ideally be supported by additional protections (such as guarantees or other security). Delayed contributions should, where possible, be repaid within the current recovery plan term.

Trustees should ensure that banks and other funders are being supportive and that no dividends or other distributions are generally being made during the period of suspension/reduction. In particular there should be a legally binding commitment not to pay dividends.

Requests to suspend or reduce normal employer contributions in respect of ongoing accrual should be treated in the same way. Where these contributions are unaffordable, the Regulator suggests that amending future accrual is unlikely to be an appropriate temporary option.

If the employer requests a release of existing security held by the scheme, the Regulator cautions that this is unlikely to be in the best interests of members.

The Regulator cannot change existing statutory obligations but will not take enforcement actions in relation to late reporting of unpaid contributions or a failure to pay contributions during the next three months. However, the Regulator still expects trustees to report any late payments or failure to pay in accordance with the regulatory framework.

Finally, whatever action trustees and employers decide to take, they should get appropriate legal, financial and actuarial advice. This will help them to determine what is possible under their scheme rules and avoid unintended consequences such as missed payments and accidentally triggering scheme wind-up.

Investments

The Regulator has considered investment issues separately in the context of DB and DC schemes. Many issues are common to both but there are additional issues in DC schemes where members bear the investment risk.

Issues for DC schemes: The Regulator acknowledges that some DC members might have significant levels of exposure to equity investments and may have seen their fund values fall significantly. However, most members will be invested for the long term and should be able to tolerate shorter-term volatility.

Trustees should consider how individual members might react to falls in their fund value or a reduction/loss in earnings. In particular, members could make inappropriate decisions, crystallise losses or be exploited by scams. As a result, trustees should review member communications and consider highlighting what market volatility might mean to different groups of members, the current risk of scams and the need to take appropriate investment advice before making decisions.

Issues in DB schemes: Trustees should review their cashflow requirements and how they expect obligations to be met. They should allow for issues such as additional "cash strain" arising from increased member movement, potential reduction in or suspension of DRCs and lower levels of investment income.

Issues for all schemes: All trustees should review their investment governance structures and delegations to ensure they can continue to function and make decisions in the event of trustee incapacity or absence. They should determine whether they need to make any changes to their investment and risk management governance framework.

Trustees should consider whether any changes need to be made to their portfolios and the appropriateness of existing investments. The Regulator also highlights the possibility that current market conditions may create opportunities and trustees should consider these, with appropriate investment advice.

Transfer values and benefit options

The Regulator knows that there is an enhanced risk of pension liberation scams in the current climate and says that trustees should be aware of and give greater attention to this. Trustees may also want to consider whether current transfer terms remain appropriate or whether they need to be reviewed.

The Regulator says that in light of this, trustees may want to suspend CETV quotes and payments for up to three months: if so, the Regulator will not take any action. After three months, if trustees continue with a CETV suspension or delayed quotations, they should be clear about the reasons for this and notify the Regulator. Trustees will still need to take into account their wider duties when considering whether to suspend CETVs and ensure there is a clear rationale if this approach is taken, especially given some members may have a legitimate reason for wanting to take a CETV at this time.

The Regulator has said that the Pensions Ombudsman will also take account of the Regulator’s guidance and the impact of Covid-19 when considering any member complaints about actions taken by trustees.

Trustees may also wish to review the terms they offer for other benefit options such as cash commutation and early retirement terms.

Administration

The Regulator recognises that there is likely to be significant strain on scheme administration. As a result, guidance suggests that trustees should agree with administrators which activities should be prioritised in the event of under-resourcing. The Regulator regards pensioner payments, retirement processing and bereavement payments as priorities and accepts that there may be delays in certain “non-critical” services.

If benefits cannot be paid, the Regulator says that it should be notified immediately.

PASA has also published guidance on administration in the context of Covid-19 which provides more information on how to prioritise tasks and what should be treated as important.

Coronavirus crisis - what schemes can expect from the Regulator

The Regulator is aware of the difficulties for both schemes and employers caused by the current situation and intends, so far is it is able, to be helpful.

The Regulator cannot change existing statutory obligations. However, it has said that during the current crisis it will take a reasonable, pragmatic and proportionate approach to regulation. To this end, the regulatory easements set out above will be maintained until 30 June 2020 and the Regulator will review whether this date needs to be extended as time progresses.

The Regulator has made it clear that it will continue to monitor the situation and produce additional guidance as and when the need for it becomes apparent and it has had time to consider the issues. In particular, it is hoped that something further might be issued in relation to how auto-enrolment requirements should be operated at the moment and whether any easements will be applied.

Finally, it is worth remembering that, although the Regulator has said that it will not take regulatory action in some areas, this does not necessarily mean that things such as suspending and reducing employer contributions can be done under scheme rules or will not have other legal consequences. Therefore, trustees and employers need to ensure that, when they are making any decisions about how to cope with the current crisis, they take into account the wider legal implications of any decision.