Regulator striking the right balance on deficit holidays

Today, many of those same trustees are being encouraged to be sympathetic to employer requests for payment holidays. In these extraordinary times, trustees are under great pressure to strike the right balance between protecting members and not pushing employers into insolvency with cash demands.

The Pensions Regulator, too, faces a difficult balancing act in getting its response correct to the crisis. Prior to the pandemic, it was positioning itself as a tougher regulator, but the crisis has forced a rapid rethink of its priorities. 

The regulator’s current approach strikes a reasonable balance between giving genuinely struggling employers breathing space, while protecting members

In April, it relaxed its rules to give employers – hard hit by the Covid-19 outbreak – breathing space to suspend or cut deficit repair contributions for up to three months. This was the right response with businesses knocked sideways due to the immediate impact of the lockdown.

Regulator pressured to extend deficit holidays

However, the dilemma the regulator now faces is what to do beyond June 30, when it is due to review its emergency three-month easement. Without the benefit of a crystal ball, it is difficult to know whether the emergency measures will still be fully required, or will need to be loosened even further.

But in spite of this, TPR is under pressure to go further and allow employers to defer their DRCs for up to six months. This approach is being supported by sections of the industry that argue the focus for businesses now should be on conserving cash. 

The watchdog should be wary of an immediate extension to its three-month easement. First, there is already evidence that some employers are using the crisis to try and cop out of their pension obligations.  

Under the emergency rules, trustees can agree to a three-month payment holiday, without full sight of the information ordinarily needed to support an employer request of this sort. However, any plea for a longer payment holiday must be subjected to much tougher scrutiny. 

At an FT Live webinar on pensions funding in May, Dalriada Trustees reported that some employers, albeit a minority, were viewing the emergency easements as a free pass to demand payment breaks.

In fact, the easements come with strings attached, such as a requirement to pay back missed contributions and the freezing of dividend payments for the duration of the payment holiday. Trustees must also ensure the scheme is being treated fairly compared with other creditors.

Fortunately, the members of these schemes had professional trustees in place to set the employers right. But what of the more than 2,000 small schemes that do not have professional trustees looking after their interests, and which may find it tougher to push back against chancer employers? 

The regulator already has concerns about the quality of trusteeship in thousands of smaller schemes where governance and administration has been found to be patchy. 

Trustees told to get advice

Second, trustees are already being asked to agree to payment holidays beyond three months, in situations where they may not have full sight of all the information needed to assess whether the employer’s plight was as bad as portrayed. The regulator says trustees in these situations should seek professional advice to judge if the request is reasonable. 

Again, this may be problematic for schemes where an employer will not pay for the extra covenant advice, or the trustees are unable to release cash from the scheme to do so. 

In these instances, TPR says it will help trustees facing difficult situations. But could the Brighton-based watchdog, itself facing operational pressures from lockdown, really cope with a flood of calls for help from smaller schemes?

There is a danger that extending the current three-month easements today would inject even more risk into the system for hundreds of thousands of members of smaller schemes, as trustees come under pressure to agree payment holidays, without professional advice.

This would exacerbate the pre-existing inequities between large, well-governed schemes with professional trustees, and the smaller plans with well-intentioned but less skilled or robust governance. It is also the case that not all schemes will be badly affected by the Covid-19 crisis, with some even seeing their funding position improved.

No one is denying the extent of the challenges the current economic crisis presents to employers. But the regulator’s current approach strikes a reasonable balance between giving genuinely struggling employers breathing space, while protecting members. It is right the approach of short-term reviews of the emergency measures remains in place.

Josephine Cumbo is pensions correspondent for the Financial Times