The government has been called on to take “urgent action” and implement a six-month contribution holiday for defined benefit pension schemes, in a bid to allow sponsors to keep their businesses afloat.
In a letter to chancellor of the exchequer Rishi Sunak, Sylvia Pozezanac, UK chief executive at consultancy Mercer, urged current guidance from the Pensions Regulator to be extended further.
At the end of March, the watchdog launched new guidance aimed at helping employers freeze their DB obligations for three months in response to the economic fallout from coronavirus.
At the time, TPR cautioned that suspensions should not be longer than three months without trustees receiving concrete evidence that the restructuring is necessary and being applied to other creditors and stakeholders.
While pension scheme deficits are a concern, scheme funding is a long-term financial endeavour and schemes, and capital markets, should have time to recover
Sylvia Pozezanac, Mercer
In the letter, Ms Pozezanac noted that pension schemes are long-term financial obligations, with payments made in the future, and the “diversion of vital capital into them at this time will impede companies facing immediate cash flow crises”.
“We are advocating for a balance between the shorter-term needs of plan sponsors [and] the longer-term goal of supporting retirement futures for millions of people,” she added.
Pension schemes will have time to recover
Mercer argues that if deficit recovery contributions – which would ordinarily be payable over the next six months – were allowed to be spread over the following three years, it “should be possible for much-needed capital to be temporarily allocated to keeping businesses afloat without compromising the long-term financial security of pension schemes”.
“While pension scheme deficits are a concern, scheme funding is a long-term financial endeavour and schemes, and capital markets, should have time to recover. Businesses may not, risking huge demands on the Pension Protection Fund,” Ms Pozezanac said.
TPR declined to comment on Mercer’s letter.
The watchdog’s guidance, however, already includes exceptions where the holiday period can be extended, especially for situations where the employer’s lenders are willing to agree support for longer than three months.
In these situations, “it may be appropriate for trustees to agree support of the same duration to provide stability,” the document stated.
Trustees lack covenant information
While data published on Monday showed that up to £1bn in deficit contributions could be suspended this year as trustees approve payment holidays, boards still lack clear information on the strength of their sponsor covenant.
According to research from Hymans Robertson, this is the major barrier to agreeing to a contribution holiday, cited by 47 per cent of pension trustees and professionals who attended a webinar on April 17. Around a fifth (21 per cent) of respondents also cited scheme funding as a major barrier to a deferral request.
The consultancy estimated that 14 per cent of schemes have either received, or are expecting to receive, a contribution deferral request.
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According to Alistair Russell-Smith, head of corporate DB at Hymans Robertson, the speed and scale of the Covid-19 crisis has had a severe impact on the economy and businesses around the globe, which means some employers are looking for short-term relief from pension contributions.
He noted that “a lot of pension scheme trustees do want clear information on the covenant impact before agreeing to a deferral request”, and this comes before they can even consider other issues, “such as deferrals for longer than three months or raising more debt”.
Mr Russell-Smith added: “Ultimately, it will be in the long-term interests of all parties to reach an agreement and for trustees to support their sponsor through a difficult, but hopefully temporary situation.
“The impact of the virus, and the measures to contain it, will be different for every business. I’m sure, however, that both trustees and TPR will be keen to ensure these flexibilities are still used in the right way.”
