COVID-19: Pension Scheme Governance Issues – Covenant and Funding

COVID-19: Pension Scheme Governance Issues – Covenant and Funding

Stuart Henderson, Director, Pension Funds
COVID-19: Pension Scheme Governance Issues – Covenant and Funding

In our ongoing series on getting to grips with governance, we have already provided our insight into scheme governance issues which Trustees should consider, covering Trustee effectiveness and administration. This week, we are looking at covenant and funding.

The continuing impact of COVID-19 varies dramatically from industry to industry, however it is clear that the UK economy as a whole has significantly contracted compared to the previous year. The Office for National Statistics published data showing that the economy shrank by 19.1% for the three months to May 2020, compared to the same three months in the year before. The indication is that number of employees on PAYE fell by 2.1% in May 2020 compared to March 2020.  

At the time of writing, the latest statistics available show that the overall the economy increased by 1.8% in May 2020 compared to an expected increase of 5.5%. It will be interesting to see what level of rebound there is in the economy over the coming months, with retail having reopened in June 2020 and the remaining parts of the service industry being able to open up in the coming weeks.

Funding levels continue to be volatile as reported in the PPF 7800 index published by the Pension Protection Fund. The aggregate deficit on a section 179 basis of the 5,422 schemes in the PPF 7800 index was estimated to be £135.9bn, £128.5bn, £176.3bn and £174.8bn in March 2020, April 2020, May 2020 and June 2020 respectively. 

But what does this mean for Trustees and their pension schemes? 

Reading about the state of the economy and funding levels can be depressing, but what does this actually mean for Trustees? Unless your scheme’s principal employer is Amazon, it is likely that the covenant and funding levels have been affected by the current situation. But the question for Trustees is by how much, and is this short term or long term?   

Unlike the short termism of the market, Trustees need to consider the short, medium and long term health of the pension scheme, which depending on your funding level can be linked to the short, medium and long term health of the principal employer.

The Pensions Regulator published their guidance on DB scheme funding in relation to COVID-19 to Trustees on 27 March 2020 which was subsequently updated on 16 June 2020. This provided an update to their view of the impact of COVID-19, explained how they are continually adapting their regulatory approach and provide guidance for trustees dealing with difficult decisions.

It was welcome to see the recognition by the Pensions Regulator that there is no crystal ball out there. However, they did reinforce their view that if hindsight proves that a wrong decision has been made, Trustees need to ensure that they can defend their decision at that time. They stated that Trustees should have:

  • obtained as much relevant information as they reasonably could
  • ignored irrelevant considerations and taken into account only the relevant factors
  • taken professional advice where appropriate
  • acted in accordance with the provisions of the trust deed
  • made the decision in good faith
  • need to keep full records of the decision-making and how they reached their conclusions.

How we can help

The aim of any pension scheme is to provide members with the benefits they are due under the Trust Deed & Rules. COVID-19 has affected schemes and their sponsors is many different ways and there is no right answer for Trustees. Therefore to ensure that Trustees show that decisions are made in the interest of members, Trustees need to ensure that they have covered the points raised by the Pensions Regulator described above. 

Our next instalment of getting to grips with governance will be covering investments, but if you wish to discuss this further in the meantime then please contact us.

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Judith Hetherington
Judith Hetherington
Partner, Pensions Funds Group
London & Midlands