Danyal Enver: Covid-19 corporate distress: what employers and trustees need to know

Thanks to Covid-19, business is bad. Despite government measures to alleviate the impact and help organisations to continue operating, the fallout creates multiple challenges. Economic ramifications include adverse effects on employers’ solvency and cashflow, and on demand for their products and services. Employers and trustees should, therefore, act swiftly in anticipation of widespread corporate distress and prepare for the potential impact on pension schemes.

For those involved in running occupational pension schemes, The Pensions Regulator (TPR) has adopted a flexible approach on reporting and enforcement. It is helping to support businesses by suspending regulatory initiatives, granting longer compliance periods, relaxing enforcement and taking a risk-based approach instead.

Although trustees and employers remain bound by their statutory duties and scheme rules, TPR aims to help them cope. For example, its deadline for reporting late payment of employer contributions to their schemes has been extended from 90 to 150 days. TPR has also said trustees of defined benefit (DB) schemes should be open to employer requests for deficit repair contributions to be suspended, initially for short periods of no more than three months and is relaxing its relationship managed supervisory activity. Trustees who are uncertain of how TPR changes might affect their obligations should seek legal and actuarial advice.

The Pension Protection Fund (PPF) has made clear that the levy to be collected this year was calculated based on pre-Covid-19 figures and will therefore not be impacted by the pandemic. It has not yet formally granted extensions to the levy data deadlines, although its website advises that reasonable, Covid-19-related late submissions will be permitted and it states it is considering ways in which it can support employers in these unforeseen circumstances and will communicate any decisions before levy invoicing starts. Employers cannot reprioritise these submissions entirely but should be alert for further news.

Communication between employers and trustees is more vital than ever. When employers become aware of cashflow changes, such as key payment dates, they should let trustees know. Employers should also assess any restrictions on their current and future borrowing facilities, and make trustees aware of them. It is equally important to inform them whether banking covenant tests will be met. Fully appreciating the employer’s financial position will help trustees understand the current covenant strength and consider whether to agree to any request to suspend contributions and if so, how long for. Employers should also discuss with trustees any proposed payments between group companies to improve overall covenant strength, and be prepared for trustees to ask for mitigation as they seek to ensure the pension scheme is treated equitably with other stakeholders.

Communication should extend to the financial position of third parties: the solvency of key suppliers, creditors and lenders which may affect the employer’s business. Trustees and employers should also keep updated on available government support. Employers are, for example, able to claim for the statutory minimum pension contributions under automatic-enrolment, on the wages claimed under the Coronavirus Job Retention Scheme.

Because the Covid-19 crisis is dynamic, TPR and PPF guidance may evolve, potentially with immediate effect. To act in accordance with changing guidelines, trustees and employers must stay up to date.

Danyal Enver is an associate at Arc Pensions Law.