This briefing was updated on 21 May 2020.
The Pensions Regulator has published several pieces of guidance for trustees, employers and administrators on coronavirus related issues.
Our summaries here are very abbreviated and intended as an indication of the content of the guidance. They are not a substitute for looking at the guidance itself.
The Regulator is generally taking a proportionate and risk-based approach to enforcement in light of the challenging situation. Regulatory easements, where granted, are typically in force until 30 June 2020.
- COVID-19: an update for trustees, employers and administrators (20 March)
Note: this guidance no longer appears on the Regulator's website, presumably because subsequent guidance notes replace it.
This initial guidance told trustees, employers and administrators to focus their activities on key risks to pension savers, including the payment of benefits, minimising the risk from scams, and continuing contributions. Trustees were told to assess their business continuity plan and to contact their administrator regarding theirs and to prioritise activities.
Trustees were told to tell members asking about transferring-out to exercise extreme caution and visit the ScamSmart website. They should also signpost members to the Money and Pensions Service (MaPS) website.
Reports to the Regulator should continue as normal but the Regulator will be pragmatic. Trustees and administrators were told to report immediately if they believe they will be unable to pay members' benefits.
The Regulator's regulatory initiatives are suspended but one-to-one and relationship supervision will continue. The DB funding code framework consultation deadline is extended by three months to 2 September 2020.
This says that trustees should be kept informed by sponsoring employers with the best available information but also accept that this will not be as robust as it would normally be. It lists questions for trustees to ask the sponsor to help them to assess its covenant. Trustees should consider the Regulator's integrated risk management guidance, the possibility of provision of contingent assets and whether the scheme is being treated fairly in comparison to other creditors, shareholders and associated companies.
It also lists key principles to underpin consideration of employer requests to delay paying deficit repair contributions (DRCs). Where timescales are very short, any concessions should be short term deferrals to enable information to be provided later for a more considered decision.
This says that employers should give trustees regular updates on employer outlook and contingency planning and should make all reasonable endeavours to provide trustees with the information they need to assess the impact on employer covenant and the affordability of DRCs.
The Regulator's now imminent annual funding statement will say that the Regulator will be pragmatic where trustees are being asked to agree to DRC reductions or suspensions or additional debt being secured over employer assets, provided that certain criteria are met, including a cessation of dividends.
Trustees who are close to completing valuations are not expected to revisit their assumptions and are not required to take into account post-valuation date experience (except when considering DRCs). Recovery plan submission (i.e. including valuation completion) can be delayed by up to three months if trustees need more time to assess the situation.
Trustees should be open to requests to reduce or suspend DRCs in line with the Regulator's 20 March principles (see above). Where sufficient information is not available to make a fully informed decision, trustees should, where appropriate, agree to requests to suspend or reduce DRCs for as limited a period as possible while appropriate information is being provided. Particular care needs to be taken if there is an imminent large contribution. This should not be longer than three months if the trustees are not able to fully assess the employer’s position. A condition should be full and ongoing provision of information so that trustees can monitor the employer covenant. In agreeing DRC waivers, trustees should ensure that banks and other funders are being supportive and that no dividends or other distributions are being made (which should be underpinned by legally binding commitments).
Requests to suspend or reduce future service contributions, for the employers and possibly members, should be treated in the same manner as requests to suspend or reduce DRCs. Legal issues may arise.
An employer’s request that trustees release security is likely to have significant legal and financial implications, compromising the security of members’ benefits. Trustees should take specialist advice.
Trustees should consider whether real time, specialist advice is required and should continue to continue fully to document their decisions.
Regarding investments, trustees should: review their scheme’s cashflow requirements; review and manage specific risks which may now exist within their portfolios or within their sponsoring employer’s business; review any previously agreed investment and risk management decisions due to be implemented in the future; review their investment governance structures and delegations to ensure they can continue to function and make decisions; and assess, following the recent performance of their scheme, whether they should make any changes to their investment and risk management governance framework.
Trustees may decide to suspend cash equivalent transfer value (CETV) quotations and payments to give themselves time to review CETV terms and/or to assess the administrative impact of any increase in demand for quotations. This may mean a breach of disclosure requirements but the Regulator will not take regulatory action in the next three months. Thereafter, trustees may decide to continue with the CETV suspension or delayed quotation if this is still in the best interests of their members but they should be clear on the reasons and should notify the Regulator. Trustees should also give greater attention to the heightened risk of members being targeted by scams. Please see our briefing "Pension transfers in the time of coronavirus" for more on this.
Please also see our new briefing "Investment Insights for Pension Funds".
This says that: trustees should consider how members might react to headline market/fund value falls or reduction/loss in earnings – e.g. making inappropriate decisions, crystallising losses or being exploited by scams; trustees should review and manage specific risks that may now exist within their portfolios or with their service providers; trustees should review any previously agreed investment and risk management decisions to be implemented in the future; trustees should review their investment governance structures and delegations to ensure they can continue to function and make decisions; and trustees should assess, following the recent performance of their scheme, whether any changes to their governance framework or provider arrangements should be made at an opportune time.
On 13 May, this guidance was amended to include guidance on dealing with employer proposals to reduce DC contribution rates and to state an expectation that trustees and administrators should prioritise DC transfers as core financial transactions.
On 21 May, a section was added on how diverting DC contributions to a new investment fund option following the gating (temporary closure) of an investment fund (e.g. a property fund) can create a new default fund. This can bring into play the charges cap and require the preparation and disclosure of a new default fund statement of investment principles.
This is a press release quoting the Regulator, the FCA and MaPS, urging individuals to keep calm and not rush into any decisions about their pension. It warns about scams and pensions being a long-term investment.
This tells trustees to work with their administrators to make sure they can deliver critical processes and core functions. It notes what some of these might be and says that new or updated process should be in line with PASA's COVID-19 guidance for administrators. Trustees are again told to contact the Regulator if they believe they will be unable to pay benefits on time.
This says that automatic enrolment, automatic re-enrolment and payments of contributions should continue in line with existing requirements. Employers who think they may not be able to make their pension contributions are told that they should contact their pension provider in the first instance to explore whether there is flexibility to change the due dates.
It also clarifies that the employer contribution claim that can be made under the Coronavirus Job Retention Scheme for 3% of qualifying earnings is regardless of the basis on which DC contributions are paid to the scheme. On 17 April, it was amended to state that where the employer pays contributions for a furloughed worker of less than the automatic enrolment minimum, it can only claim based on what it actually pays.
Regarding the Pensions Act 2004 "listed change" consultation requirement for employers with 50 or more employees who (among other things) wish to reduce the employer contribution rate, it says that the Regulator will not take regulatory action "in respect of a failure to consult for the full 60 days" in specified circumstances, including where only furloughed staff are affected and the employer has written to affected staff and their representatives. Employers are encouraged to carry out as much consultation as they can.On 6 May, "DC" was inserted in the title and more detailed content was added.
In this very short piece, the Regulator asks scheme providers to report late contribution payments (to members as well as to the Regulator) at 150 days late, rather than the 90 days set out in code of practice 5 for occupational pension schemes and code 6 for personal pension schemes. (This change was reported in the pensions press on 27 March, apparently based on letters to providers, but was not announced publicly by the Regulator until it issued this guidance on 9 April. We note that there is currently no similar public statement addressed to trustees or employers.) NB See the guidance immediately above regarding the Regulator's expectations about the ongoing payment of contributions.
This outlines the Regulator's more flexible approach to its reporting requirements and approach to enforcement. If a breach will be rectified within a short timeframe (not more than three months) and it does not have a negative impact on savers, there is no need to report. The Regulator will take decisions about whether to take regulatory action on a case-by-case basis and adopt a flexible approach.
It also lists particular approaches in particular areas, including some where the approach will not apply (e.g. for notifiable events).
Regarding DC chair's statements, where the Regulator has no enforcement discretion under the regulations, it says "we will continue to impose fines if schemes don't comply with this requirement. However, to ease the burden for schemes, we will not issue penalty notices before 30 June 2020. … We will not be reviewing any chair's statements we receive, for example through master trust submissions or via annual reports and accounts, before 30 June 2020. Any such statements will be returned unread, and not reviewed. This should not be taken as any indication that the statement in question complies with the requirements."
It says that despite the concession on reporting late payment of DC contributions, it is very important that trustees invest contributions promptly when they are received.
This provides technical guidance, including worked examples, about pension contributions and CJRS claims where there is a salary sacrifice arrangement and/or where there is certification of DC contributions (i.e. usually where pensionable pay is not the same as automatic enrolment "qualifying earnings"). It notes that there may need to be a discussion with the payroll provider to ensure that contributions are correctly deducted and paid and that employers can potentially change their method of complying with DC automatic enrolment requirements and claim more under the CJRS.
This page for trustees and administrators focuses on communicating with members. It addresses the increased prevalence of scams and the higher risk of hasty member decisions following, for example, adverse market movements, fears of employer insolvency, constrained personal finances and a desire to pass on pension savings in the event of early death. It outlines the Regulator's expectations of what members should be told and when, including as to disrupted services; scams and other risks associated with transfers; opt-outs; and market volatility.
See also the Regulator's updated pension scams page.
Annual funding statement 2020 (30 April)
This statement is particularly relevant to DB schemes with valuation dates between 22 September 2019 and 21 September 2020 and other schemes undergoing significant changes that require a review of their funding and risk strategies. It sets out guidance on how to approach the valuation under current conditions resulting from the coronavirus and addresses various matters in relation to employer covenant, including assessment and monitoring and the dangers of "covenant leakage" through shareholder distributions and other ways.