UK Pensions Regulator refreshes its guidance for trustees on being prepared for sponsor distress

The UK Pensions Regulator has updated and re-issued its guidance for trustees of defined benefit pension schemes, urging them to be prepared for signs of sponsor distress. If trustees are ready to take protective action at an early stage, more options will potentially be available to them, which should maximise their ability to protect members’ interests.

The guidance was first issued during the Covid-19 pandemic in November 2020, and we previously reported on it here. The revised version appropriately moves away from the economic context of lockdown, so that it is clear the Regulator expects trustees to remain vigilant on an ongoing basis. That said, it is also apparent from the Regulator’s blog post announcing the refreshed guidance that the context in which it has been re-published is the current UK economic climate of increasing inflation, interest rates and fuel/energy prices, together with increased levels of debt taken on by businesses.

The substance of the guidance has not changed. By way of reminder, the key message is that trustees should have a seat at the table in any discussions between distressed sponsors and other stakeholders at an early stage to maximise leverage for their position. Employer sponsors should be prepared to engage with trustees in restructuring discussions at the earliest opportunity.

Trustees should ensure they are in a position to engage with corporate sponsors early and effectively, including by:

• adopting an integrated risk management approach, including workable contingency plans and suitable triggers to warn them when employers are in distress;
• reviewing their scheme governance to ensure the trustee board has appropriate experience, structures and processes to help make effective decisions to manage risks and protect members;
• monitoring the covenant that supports the plan to identify key risks that could be a sign of corporate distress such as profit warnings, cash flow constraints, credit downgrades, breaches of banking covenants and debt refinancing; and
• agreeing a formal information sharing protocol with corporate sponsors to give trustees sufficient visibility of events that impact on the covenant.

Further, trustees need to ensure that they understand the position of the scheme and the trustees’ leverage, as well as the position and leverage of other key stakeholders, and that they use that understanding to maximise appropriately opportunities to protect the scheme’s position, including in particular where concessions or support are sought from the scheme.

There is a notable addition to the guidance which makes clear that it may be appropriate for trustees to receive information from their sponsor’s wider corporate group, as well as the sponsor itself. This is a useful reminder for all corporates with a UK defined benefit pension scheme in their group that they need to consider the potential impact on that scheme of any corporate activity within the group, particularly in view of the Regulator’s wide-reaching criminal and civil powers under the Pension Schemes Act 2021, which can apply to any person.