COVID-19: Dealing with a contributions crisis

A look at how trustees should respond to employer requests for changes or suspensions to employer contributions in light of the COVID-19 crisis

23 March 2020

In the current circumstances, many sponsoring employers will undoubtedly be experiencing acute financial difficulties, and both employers and trustees may be required to take urgent action. 

We are already seeing trustee clients being asked to agree changes or suspensions to employer contribution rates, as sponsors experience severe cash flow difficulties. These requests are entirely understandable.

We think now is the time for trustees to consider certain of their key powers and responsibilities, both under scheme rules and legislation, as the use of these powers (or a decision not to) may be required to safeguard member benefits in this volatile environment.

Likewise many employers are likely to need to take urgent steps to preserve cashflow and will want to understand their ability to do so. Early and transparent communication with stakeholders including pension scheme trustees will be critical.

Changes to employer contributions

Where an employer requests any kind of variation to employer contributions, trustees will need to give full consideration to the implications for members and the security of benefits. This will involve analysis of the employer’s ongoing viability, the strength and enforceability of any contingent assets and the funding levels of the scheme (including the PPF funding level). 

In some circumstances it will be vital to obtain input from covenant advisers. Whether this is practicable will depend on the circumstances in each case – in some situations matters will be too fast moving to make this feasible. It is important to give consideration to whether covenant advisers might be able to assist and to document the conclusion reached either way.

The Pensions Regulator will also expect trustees to test that employers are not trying to treat pension scheme liabilities as a 'soft touch' – so, for example, trustees should look to confirm what other steps employers are taking to negotiate payment suspensions with other creditors or to access government funding. On that note, trustees should continue to monitor the position so that they are properly informed on the timescales and scope of the support. Read about the current position here.

If agreement is reached, it is important that the scheme’s current schedule of contributions, and if appropriate the recovery plan, is properly amended. Any informal agreement between trustees and employers to vary or suspend contributions could be problematic. For instance, non-payment of contributions under a schedule of contributions (which would arise under an informal arrangement) becomes a statutory debt, and trustees would then be required to give careful consideration as to whether this debt should be enforced. Informal arrangements could therefore produce further uncertainty for both trustee boards and employers.

In some severe and hopefully rare cases, it could be in members’ best interests for trustees not to agree to employer proposals. This could clearly have significant consequences for the employer, so proper consideration of all issues is vital. In other cases, it will likely be in the long-term interests of all parties to reach agreement and for trustees to do what they reasonably can to support their employer through this tough (and hopefully temporary) situation as ultimately that is likely to be in the long-term interests of all parties.

All decisions, whether that is the overall decision to agree a change in contributions, or a decision to take or not take advice on a particular issue  should be recorded carefully with a very clear paper trail.

Not all decisions trustees make over the coming weeks will turn out to be the correct ones but provided they acted reasonably in reaching whatever decision they reached (and can demonstrate that from the paper trail), they ought not to be liable for breach of trust. 

Trustee powers

Trustees should remind themselves of their key powers under the rules of their schemes, such as the contribution and wind up powers, and consider under what circumstances these powers might be used. Urgent and sometimes proactive action may be required, and Trustees should take particular care to check that expected contributions (that have not been deferred by agreement) are being received.

These are clearly difficult decisions and, in addition to legal input, covenant analysis and scheme funding levels will be key considerations. For example, the position of a scheme funded below PPF levels and with a distressed but potentially viable employer will be very different to a scheme currently funded above PPF levels and with an employer that looks certain to fail.

For schemes with foreign employers, particularly urgent action could be needed. Issues around PPF eligibility and ring fencing of UK based assets could heighten the need for trustees to take pre-emptive steps.

Contingent assets

If schemes have the benefit of contingent assets, such as a parent guarantee or escrow account, now may be the time for trustees to consider if and when funding from these sources could be accessed. Again, pre-emptive action may be required in order to safeguard these scheme assets.

If you require assistance with any of the issues discussed above, please contact Richard Knight or your usual Burges Salmon contact. Our pensions team is ready to assist all clients during these testing times. 

Key contact

Richard Knight

Richard Knight Partner

  • Head of Pensions
  • Pensions Services
  • Pensions Legal Advice

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