How is the Pensions Regulator engaging with pension scheme sponsors and trustees in the current environment?

14 minute read
09 June 2020


Gowling WLG / First Actuarial joint article

The current trajectory of The Pensions Regulator - an update on the Pensions Regulator's current approach to engagement with and scrutiny of occupational pension schemes, trustees and their sponsors. This review revisits the themes we discussed in our webinar in January 2020, following the impact of COVID-19.

In the past four months, it feels as though the world has shifted on its axis. As a result of the coronavirus pandemic, we are living through unprecedented times, with significant changes for all of us.

We thought it was time to take stock and revisit some of the themes in our January 2020 webinar. Does what we said in January about the current trajectory of the Regulator still ring true? What has changed? What remains the same?

What were we seeing in early 2020?

During our joint webinar we shared our common experience and case studies of a greater level of regulatory scrutiny for many occupational pension schemes, including small schemes. Risk factors such as the recovery plan length and level of dividend payments were commonly being used to justify selection for heightened scrutiny by the Regulator.

Interventions were becoming more detailed, with larger schemes being allocated a dedicated case manager at the outset of actuarial valuations and, in some cases, a formal process of relationship supervision. Schemes of all sizes were being asked for more information (in sometimes quite forensic levels of detail) by the Regulator.

We were also seeing a targeted approach by the Regulator to employers in certain sectors, including (but not exclusively) retail, automotive and not-for-profit organisations. In some cases, the Regulator was being more direct than previously in asking trustees and scheme sponsors whether ongoing accrual in open defined benefit schemes remained appropriate, given their covenant, maturity and funding levels. We had not seen this before.

As a result of the 2019 annual funding statement, which challenged schemes to target a seven-year recovery plan or less, we were seeing the Regulator contacting schemes with recovery plans exceeding seven years to understand the rationale for that.

In our experience, once intervention began, the Regulator's attention would frequently expand to scrutiny of the strength of the employer's supporting covenant and the scheme's investment strategy. In other words, the integrated risk management (IRM) framework's key risks. A trend has been the Regulator disagreeing with the trustees/their covenant advisors' conclusions as to the strength of the employer covenant (with the Regulator sometimes concluding that the covenant was weaker than as determined by the trustees).

While many of our respective clients were keen to engage with the Regulator and respond fully to its requests for information, it did seem that, in some cases, the provision of information by the trustees only led to more, rather than less, Regulator involvement (including in cases with a strong sponsor and a well-documented rationale for agreements the trustees and employer had reached).

What are we seeing now?

Shift of focus

There is no doubt that the Regulator has shifted its focus, as an understandable response to current events.

The Regulator has, in its recent guidance specific to the COVID-19 situation, stressed its expectation that contributions to both defined benefit and defined contribution schemes should continue as far as possible - reflecting one of its statutory objectives to protect members' benefits.

It has, at the same time, recognised that employers might look to agree a reduction or suspension in deficit recovery contributions (DRCs) to defined benefit schemes in the short-term, with guidance around what parameters may be considered acceptable by trustees.

Similarly, the Regulator has also issued guidance in relation to defined contribution schemes and the steps employers should take when considering reducing defined contributions. The various COVID-19 regulatory guidance issued over recent weeks demonstrates a pragmatic and flexible Regulator, responding quickly to the challenges facing schemes and their sponsors.

There will be tension between the Regulator's statutory objectives

The unspoken challenges will come from the interaction between the Regulator's various statutory objectives in these particularly challenging times. Sitting alongside its objective to protect members' benefits, is its obligation to reduce calls on the Pension Protection Fund; this will no doubt be critical in the coming months.

A third statutory objective is to minimise any adverse impact on the sustainable growth of the sponsoring employer in the context of scheme funding discussions. Times like these only highlight the delicate balancing act for the Regulator when choosing how and when to intervene with the funding of, and support given to, occupational pension schemes.

We have already seen this tension in the responsive COVID-19 regulatory guidance referred to above, balanced against the more stringent expectations on trustees to closely monitor for covenant leakage outlined by the Regulator in its 2020 annual funding statement. The Regulator will have to find a path to tread which appropriately balances the protection of members, sets realistic expectations of trustees, while also being seen not to undermine sponsors' attempts to remain viable.

Practical changes

In the immediate short-term, the Regulator has suspended some of the less vital regulatory initiatives such as the relationship supervision we mentioned during January's webinar, especially where this was about establishing best practice rather than due to material concerns.

The difficulties faced by a number of high-profile, larger employers as a result of COVID-19 and the current lockdown means that this might result in less regulatory attention for small schemes in the short-term.

Our respective experience is that the Regulator is currently reducing or stopping significant engagement with some small schemes where one-to-one supervision might otherwise have continued. In some (but not all) cases, proactive engagement with larger schemes continues. We see this mainly where there is an immediate covenant threat and/or ongoing valuation discussions.

Recovery plan duration

The 2019 annual funding statement's aspiration of a recovery plan of seven years or less seems less viable now. Low risk funding targets (in part driven by the long-term funding target requirement and 'fast-track' valuations) were already likely to put pressure on recovery periods. The challenges flowing from COVID-19, making it harder for sponsors to maintain their deficit recovery contributions (DRCs), are also likely to lengthen recovery periods.

This is likely to be particularly apparent on a sector level, with high street retail, air travel, hospitality, live entertainment, and automotive sectors (and therefore manufacturing) among the worst affected. For these employers, the Regulator's guidance on sponsors' ability to agree with trustees to suspend or reduce DRCs might be helpful, but will not be a long-term solution.

One option, which we are seeing some sponsors consider, is the use of contingent assets (such as guarantees) to justify a longer recovery period. Whether this is a viable option will be employer specific; many parent companies may not be willing or able to offer contingent assets at present, as they will also be under pressure from other creditors, such as banks, to provide security.

A further option which the Regulator is keen on, and which seems sensible, is for additional contingent contributions to be built into the recovery plan, so that the trustees don't lose the opportunity to benefit from improved funding when the sponsor's profitability and cash flow position improves.

What remains the same?

Crucially, the principles sitting behind the Regulator's more interventionist approach remain relevant. This is apparent in the Regulator's 2020 Annual Funding Statement.

If the Regulator currently doesn't have the capacity to get involved with all schemes that might be facing challenges, it will no doubt, be working through an internal strategy to get to those schemes in time. We are assuming that where the Regulator is seemingly less engaged than it might have been at the beginning of the year, that engagement will no doubt come again where issues remain unresolved from the Regulator's perspective.

In addition, let's not forget, other than short delays, it is full steam ahead with the new Pensions Bill and consultation on a new defined benefit funding code, which is expected to come into force in late 2021. Current indications from the Regulator are that trustees' focus on integrated risk management and the long-term funding target will be just as, if not even more, important. Key messages contained in the draft code are unlikely to be materially altered by COVID-19 pressures.

Employer covenant

Other themes we identified in January still ring true. In particular, the Regulator remains focussed on trustees' ongoing monitoring of the employer covenant, with a stronger urgency for trustees to be taking third party covenant advice in order to assess this.

The Regulator recognises that the current situation doesn't easily allow this; events are unfolding rapidly and trustees may not be given sufficient information from scheme sponsors to enable them to properly assess the sponsor's financial position. Where information is provided, the pace of change means that it still may not be easy (even for professional covenant advisors) to assess the strength of the covenant.

What are the takeaways for scheme sponsors and trustees?

1. Focus on collaborative working wherever possible - this has always been something we advocate and is encouraged by the Regulator, but will be critical at present.

  • Sponsors should be involving trustees in decision-making around the business's financial position, discussions with third party creditors and, wherever possible, providing the trustees with up-to-date financial data (accepting for many businesses this may be in some flux) to enable an ongoing covenant assessment to take place.
  • Trustees should anticipate and seek regular updates from scheme sponsors to ensure the scheme is treated equitably alongside other stakeholders. Ensuring equitable treatment was a key message in the 2019 annual funding statement. This comes through even more powerfully in the 2020 annual funding statement.

2. Covenant assessments

  • The 2020 annual funding statement places higher expectations on covenant assessments in terms of frequency and intensity. Specialist covenant advice is encouraged for complex and deteriorating covenants or where a scheme has a significant deficit and/or carries investment risk.
  • Linked to the point above, trustees should focus on the ongoing monitoring of the employer covenant with regular dialogue and exchange of information with the employer; accepting that in some cases trustees will be relying on incomplete information when doing that monitoring.

3. Review recovery plan length

  • We think recovery periods are likely to lengthen due to the current COVID-19 circumstances.
  • Whether you are in the midst of an actuarial valuation or having to renegotiate an existing recovery plan, try to use a collaborative approach to strike a balance that is right for your circumstances. Trustees are unlikely to want to damage the sponsor for the sake of a short recovery period.
  • Trustees should consider a range of scenarios and plan future actions around them.  Building in additional contingent contributions for when profitability improves would also be a good idea.

Where to go next for more information

In reflecting on the above key takeaways, you may find it helpful to revisit our January webinar.

Our insights below on the following may also be useful, alongside several further resources from First Actuarial:

How COVID-19 will lead to an accelerated normal rather than a new normal in pensions.

Accelerating the pace of change (the Month in Pensions - May 2020) - our monthly pensions podcast. The May issue examined TPR's Annual Funding Statement, new guidance on COVID-19 and pensions and High Court cases on RPI / CPI.

What does TPR's funding statement mean for trustees and employers?

First Actuarial May 2020 Briefing on the 'Annual Funding Statement'.

Frist Actuarial March 2020 Briefing on 'COVID-19: three months to take stock for DB trustees'.

First Actuarial's Checklist on 'Managing your pension scheme during a pandemic'.

We will continue to keep you up-to-date in this changing landscape. If you have any questions about how changes in the Regulator's approach may impact your scheme and what it means for trustees and sponsors, please contact us.

You can also access our COVID-19 client hub for more insight and resources to help manage your business during these unprecedented times.

This article was co-authored by Gowling WLG and Marcos Abreu from First Actuarial (

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