The Pensions Regulator (TPR) in the UK has warned defined benefit (DB) pension fund trustees to ensure they have an appropriate understanding of employers’ financial positions and potential future challenges, following significant turbulence recently that the UK economy has had to endure.
In a blog post on the regulator’s website, Nicola Parish, executive director of frontline regulation, noted that “increasing inflation, interest rates and fuel/energy prices have impacted both businesses and the public alike”.
“In addition, according to the Bank of England’s monthly ‘Money and Credit’ statistics, the level of debt taken on by UK businesses has increased during the pandemic which has reduced resilience and there has been an increase in borrowing by small and medium-sized enterprises,” she added.
She said that a high level of debt among businesses can risk their ability to support DB pension schemes.
“With this continued uncertainty, we expect trustees and all relevant stakeholders to remain vigilant to further economic challenges which may negatively impact the ability of sponsoring employers to support DB pension schemes,” she continued.
Parish said that during times of economic challenge, it is even more important to closely monitor the employers’ financial position and to take appropriate advice.
Guidance refresh
The regulator has refreshed the guidance to support trustees dealing with employer stress or distress it published in autumn 2020 during the unprecedented impact on the UK economy caused by COVID-19.
The republished guidance recommendas that all trustees should adopt a fully documented integrated risk management (IRM) approach to their scheme, with workable contingency plans and suitable triggers in place.
Practising IRM will highlight problems early on, and the sooner trustees act, the greater the prospects of protecting the scheme’s position, the guidance stated. Trustees should regularly review these risk management and governance procedures to make sure they’re fit for purpose, it added.
The guidance also recommends trsutees engage regularly with the employer and with other creditors (where applicable) as this will help trustees identify and manage key risks early on.
If trustees delay putting robust scheme protections in place, other stakeholders, such as lenders, will be in a better position to exert control over and extract value from a distressed employer, potentially to the detriment of the scheme, TPR said.
“We expect all trustees to have appropriate covenant monitoring in place as part of their integrated risk management framework and we urge trustees to revisit this guidance and take appropriate action,” Parish said in her blog.
Engaging with TPR
“We remind trustees of DB pension schemes whose sponsoring employer is demonstrating signs of stress or distress, to engage with us and other key stakeholders, at an early stage,” Parish said, adding that employers and associated corporates should also know that TPR is receptive to early discussions regarding plans they are considering that may impact their pension schemes.
“Our role is not just to use our powers when things go wrong. While trustees are the first line of defence for pension savers, we can provide trustees with support so they can achieve good outcomes,” she noted.
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