Just as it forced widespread business shutdowns, the coronavirus pandemic has created new pressures and challenges for U.K. pension plans.
With companies facing cash crunches and, in some cases, insolvency—and many workers dealing with their own financial hardships—employers and pension trustees are encountering new issues and decisions.
“We’re reminding employers and trustees and pension scheme members of COVID-related strains that can be addressed in different ways,” said Catherine McKenna, an attorney with Squire Patton Boggs in Leeds.
Tensions may arise over exactly what information companies are willing to share with trustees about the business’s financial health or when an employer wants to suspend payments into the pension scheme.
Relationships also may be stressed when employers need to secure more financing to stay viable during the pandemic, because taking on additional debt could dilute the pension scheme’s position as a creditor, she said.
Trustees and companies should try to understand the other’s perspective, develop a good working dialogue and potentially sign a binding agreement about what might happen in certain circumstances, McKenna said. If the company asks to suspend contributions, she noted, “then there’s very much a need for legal advice and other professional advice,” with clear documentation of any agreed position and active monitoring.
Guidance from The Pensions Regulator
The Pensions Regulator (TPR), the U.K. office responsible for protecting plans, has issued wide-ranging guidance throughout the pandemic, including reminding employers to meet their legal obligations to provide information to trustees and alert them to “any discussions with other stakeholders, such as banks and other lenders, which may impact on the position of the scheme.”
Employer flexibility to suspend pension scheme payments while under cash strain emerged as an early, key question during the crisis, said Francois Barker, an attorney with Eversheds Sutherland in London.
“Most employers were battening down the hatches and only spending money where they had to,” he said.
Defined benefit (DB) pensions remain a significant feature in the U.K., with about 5,500 plans in place, although McKenna said the majority of workers are now enrolled in defined contribution plans.
Early in the pandemic, TPR said it expected trustees to give employers up to three months’ breathing space with relatively few restrictions if they asked to suspend making contributions to DB pension plans, Barker said, but recently updated guidance calls on trustees to require greater mitigation and justification from employers seeking more time to pay.
TPR CEO Charles Counsell recently wrote in a blog post that coronavirus “continues to challenge the pension industry,” affecting schemes and sponsoring employers. He added that “four months on, it’s clear we’ll be dealing with the economic fallout for some time,” with some employers likely to fail. Trustees remain employees’ first line of defense, he wrote.
“Empowering trustees through our guidance to have the right conversations at the right time means TPR can concentrate on areas of greatest risk and reduce any potential extra burden on trustees from a regulatory intervention,” Counsell continued. “Employers should, by this stage, be able to provide necessary financial information to inform trustees’ approach. We know, long term, the best protection for a DB pension scheme is a strong, solvent employer, which works with trustees to put the needs of the pension scheme on an equal footing to other business considerations.”
Trustees should be open to reasonable requests from distressed employers and approve those requests if they’re in members’ best interests, Counsell added.
Corporate Insolvency and Governance Act
If a DB pension plan sponsor becomes insolvent, the U.K.’s Pension Protection Fund steps in and makes sure members receive payments. The interesting question surrounds what happens if a company is struggling but hasn’t gone bust, Barker said.
Spurred into law by the pandemic, the U.K.’s new Corporate Insolvency and Governance Act offers relief to strained companies, including a payments holiday for certain financial obligations.
The act introduces a moratorium process to give a company time and help it stave off insolvency when it is likely that the moratorium would allow it to continue operating, McKenna said.
While the new law aims to help companies stay in business, it also creates pension issues.
Trustees of schemes linked to financially distressed companies may lose the ability to enforce a payment demand and could find themselves in a worse position when the moratorium ends, McKenna said.
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Risks of Cashing Out Benefits Early
Among other issues, pension trustees and employers also must decide how much and how often to communicate with cash-strapped employees about their retirement savings, Barker said, noting that some workers with DB plans might consider transferring their funds to a defined contribution plan to cash out their benefits early.
This poses several risks, including potentially heavy taxes for those accessing their benefits under age 55, depleted savings and the potential to fall victim to outside scammers playing on savers’ fears about market volatility.
TPR months ago asked trustees to send letters to employees planning such transfers to warn about the potential risks. Some employers and trustees have pushed back, however, and are considering sending their own letters to ensure members get a balanced view, Barker said.
“In a sense, what the regulator has said is fair,” as some people may be cashing out under bad circumstances, he explained. On the other hand, cashing out defined benefits could make sense for some individuals, such as plan members facing a home repossession, single individuals, those in bad health or employees with other defined benefit plans, he said.
Barker noted a market development that he believes the pandemic has accelerated: a much greater willingness among employers and trustees to make financial advice available for employees preparing to retire and draw from their pensions.
Dinah Wisenberg Brin is a freelance reporter and writer based in Philadelphia.