Help! My sponsor’s going bust!
09 Sep 2020
“UK job losses hit decade-high”
“UK economy plunges into deepest recession since records began”
Almost every day there are announcements of companies cutting jobs. With the UK officially in recession, the furlough scheme due to end in a matter of weeks, and the potential for a second wave of Coronavirus with at least local lockdowns likely, many companies are continuing to face an uncertain future.
Unsurprisingly, this is having a knock-on impact on many pension schemes. A number of companies have asked trustees to defer deficit recovery contributions for a period in light of short-term cash constraints. However, in the longer term, there is the real risk of more companies becoming insolvent.
When a sponsoring employer becomes insolvent, a ‘PPF assessment period’ is automatically triggered. If this assessment shows the scheme cannot pay PPF level benefits, it will fall into the PPF, otherwise it must secure benefits with a life insurance company and wind up.
For trustees of pension schemes, the fate of the sponsor is usually out of their hands. However, there are steps trustees can take and contingencies they can put in place to prepare the scheme for a potential sponsor insolvency and ensure members continue to be properly looked after.
Let’s look at some of the key areas for trustees to consider if they find themselves in this difficult situation.
Crucial practical considerations
- If a sponsor of a pension scheme is heading towards insolvency, it is likely that staff will be made redundant and it is possible that key employees such as scheme secretaries or pensions managers may no longer be working; consider putting in place professional services as a back-up.
- Where payroll and administration services are carried out in-house, it's possible that access to scheme data as well as finance and payroll functions could be lost; ensuring member calculations are processed in a timely fashion and scheme documentation is kept up to date will be critical. Also, consider putting alternative arrangements in place for finance and payroll to ensure these essential functions can continue.
- The scheme trustees will continue to be the point of contact for member queries when in PPF assessment; ensure scheme contact details are current and not reliant on company email addresses, for example.
- It is possible that assets may need to be moved quickly; keep authorised signatory and delegated authority lists up to date and have a plan in place for electronic signing.
- Keeping channels of communication open between trustees and the sponsor is crucial, particularly in difficult times.
- During a PPF assessment period a number of benefit changes are enforced which will directly impact members - benefits are restricted to PPF levels, no further transfer values can be paid out and ill health pensions may be subject to change; trustees should consider how best to communicate with members without causing undue panic.
Cashflow and investments
- When insolvency is looming, the sponsor may not be able to pay regular contributions into the scheme. In the absence of these contributions, schemes can struggle to pay pensions, expenses and one-off payments like lump sums; to avoid running into cashflow difficulties ensure the scheme has sufficient liquid reserves.
- Many schemes already have de-risking strategies in place, but when a sponsor is heading towards insolvency, it may be time to consider accelerating the de-risking timetable to help prevent further losses.
Worried that your scheme’s sponsor is at risk of insolvency?
Thinking through the steps you can take and the contingencies you could put in place is a good place to start.
If you would like to know more, or have any questions, please don't hesitate to get in touch.