Reducing or suspending Deficit Repair Contributions (DRCs)
Many businesses have been considering ways to ease cash flow as a result of the pandemic, with some exploring the possibility of temporarily reducing or suspending DRCs to their Defined Benefit (DB) pension schemes. The Pensions Regulator (TPR) believes that a number of schemes have already agreed a short-term suspension or reduction of DRCs, with more trustees and employers understood to be in discussions.
TPR has been sympathetic towards companies looking to use such options, and its recently updated funding and investment guidance makes clear that trustees should ‘be open to reasonable requests.’ However, TPR also expects trustees ‘to make an informed assessment of whether it is in members’ best interests to agree.’
Whilst it may have been necessary at the beginning of the crisis to agree stop-gap arrangements quickly and with limited information, TPR does not want this to become the new norm. Employers seeking either to extend existing arrangements, or to put new ones in place, can therefore expect more rigorous due diligence (including enhanced covenant monitoring).
Trustees and TPR will want to see that other stakeholders are sharing the pain and that the pension scheme is being treated fairly (expect payments to shareholders and other forms of value leaving the company to stop). Employers will also be expected to keep trustees informed of discussions with other stakeholders, such as banks and other lenders, which may impact on the scheme’s position.
Tips for employers
There has been unprecedented activity in the liability management (or derisking) market in recent years, with buy-ins, buy-outs and longevity transactions all being used to help manage DB costs. So-called ‘superfunds’ (or DB consolidators) are a relatively new kid on the block, with TPR recently introducing a new interim regulatory regime (see here) to help ensure that both savers and the Pension Protection Fund (the pensions lifeboat) are adequately protected.
Employers looking to take advantage of potential opportunities to derisk need to get trustees on board early. Different options offer differing degrees of protection, ranging from coverage of specific liabilities through to the complete transfer of risk. Each option comes with its own price tag, but well-prepared schemes will be best placed to move quickly to take advantage of market conditions. Steps that can be taken in advance include:
Employers contemplating a liability management exercise should seek specialist advice at an early stage.
TPR’s guidance for employers notes that it will be ‘reasonable in scenarios where trustees are being asked to agree to a previously unforeseen arrangement’ (such as DRC suspensions or reductions), provided that: