The financial circumstances of a scheme’s employer(s) can change significantly and quickly. Trustees should monitor the employer’s ability to support the scheme and have sufficient information sharing protocols and contingency plans in place to be able to move swiftly if things change.
Mitigate the impact of employer financial distress on a scheme
Even if the employer is not showing signs of financial distress, improving your understanding of what to look out for will help to mitigate future risk to the scheme.
A good understanding of your employer and the potential impact any change in covenant may have on your scheme (including any changes which may impact any wider group support provided) will put you in the best position to act quickly should the need arise.
Identify your statutory employer
It is vital that as trustees you are clear about who is legally liable to fund the scheme and identify which entities form part of the direct employer covenant. This can be particularly important where employers may be part of a larger group. See identifying your statutory employer (PDF, 82KB, 12 pages).
Assess and monitor the employer covenant
Once you have identified the direct employer covenant you should have appropriate processes and agreements in place for relevant information to be shared. See assessing and monitoring the employer covenant.
Consider your approach to integrated risk management
The employers’ financial information and the trustees’ assessment should form part of their integrated risk management (IRM) processes considering covenant, funding and investment risk. Trustees should be monitoring the integrated risk and have agreed triggers for further action and analysis. See integrated risk management.
Manage conflicts of interest
Management of conflicts of interest is important for good scheme governance. You should have robust procedures in place to manage perceived or actual conflicts. See conflicts of interest.
Check Annual Funding Statements
You should have a good understanding of current regulatory views including our Annual Funding Statements.
To make sure you can act quickly and effectively at times of employer financial distress, it’s important that you have the right people advising you to help you make appropriate decisions about your pension scheme. In situations where your employer’s circumstances change, you may need to consider seeking broader advice from covenant advisers, lawyers and/ or scheme administrators. See working with advisers.
Actions when the employer is showing signs of financial distress
When employers are going through challenging financial situations, they may put in place a plan of action to turn around its fortunes. You should understand any proposed plans and provide your views and expectations as an important stakeholder and creditor of the employer.
Consider your approach to integrated risk management
You should review processes for receiving employer information. If there is an increase in the covenant risk, trustees may also consider reducing risk in investment and funding strategies to rebalance the overall risk. See integrated risk management.
Manage conflicts of interest
You should revisit your conflicts of interest policy and consider whether the employer’s financial distress means additional protections are required. See conflicts of interest.
During times of financial distress there is an increased chance of corporate events impacting the employer. These can include transactions such as mergers and share, business or asset sales, restructurings, and refinancing. These events may be new to trustees and can happen rapidly. Trustees should be aware of their role, the potential impact on the scheme and how best to ensure they remain informed.
You should contact us if you are concerned that corporate events are being proposed or happening without your involvement and/or where there may be a negative impact to the scheme.
Seeking mitigation
When a proposed corporate event may have a negative impact on the scheme, you should seek appropriate mitigation. See material detriment, employer insolvency and employer resources.
Clearance
If the employer considers the transaction is materially detrimental, they may approach us for clearance. Mitigation provided should be appropriate considering the level of detriment to the scheme. See clearance.
You should notify us immediately if you believe a restructuring plan under part 26A of the Companies Act 2006 is being considered by the employer or any entity in the group with an obligation to the scheme.
Restructuring plans
If the employer is proposing a restructuring plan, they have a statutory obligation to send us any documents they are required to send to creditors. Although there is no statutory requirement to notify TPR where the company is not a DB scheme employer, we would expect you to be monitoring any broader support relied upon. See restructuring plans for employers in financial difficulty.
Notifiable events
Some employer events must be reported to us under the notifiable events framework. You will want to ensure the employer is aware of these responsibilities and may want to incorporate these actions into the IRM framework. See the notifiable events framework.
When an employer shows signs of financial distress or corporate events happen, members of the scheme may have concerns about the safety of their pension. To mitigate this, you should communicate with the members so that they don’t make rash decisions about their pension benefits. See deal with an employer event that causes concern to members and avoid and report pension scams.
Actions when insolvency is likely
If it becomes clear that the employer has a high risk of insolvency, you should contact us. They should also speak to the Pension Protection Fund (PPF) to discuss how to prepare for any transfer into the PPF.
You should remain vigilant of any proposed corporate events happening during this period and should contact us if you are concerned. See practical tips to help trustees manage risk and contingency planning for employer insolvency.
If insolvency of the scheme employer is inevitable and all other options have been considered and ruled out, it may consider a Regulated Apportionment Arrangement if certain strict principles are met. See regulated apportionment arrangements.
When an employer is facing insolvency, members may feel particularly concerned about their pension and could seek to transfer out of the scheme. This makes members vulnerable to pension scams, particularly if the employer's financial problems are in the public domain.
It is important that you communicate with members, warning of the risks of leaving the pension scheme, including the loss of the protections provided by the PPF. See deal with an employer event that causes concern to members and avoid and report pension scams.