As the UK's workforce works from home, Andy Lewis looks at how the pensions industry can respond together to COVID-19.
The world is changing. As I sat writing this, the Prime Minister rather suddenly announced new UK government advice to stop all non-essential social contact and avoid unnecessary travel.
Just as in wider society, COVID-19 will test the pensions industry. In this article, focussing on pension trustees, I will briefly outline some practical and legal considerations that may help our industry rise to the challenge.
Governance and systems
In a statement on 12 March, The Pensions Regulator emphasised the importance of contingency planning and integrated risk management. On an immediate practical level, the statement also encouraged trustees to think about continuity of priority scheme administration such as pensioner payments, retirement processing and bereavement services. Thinking more widely about member expectations, how might transfer value calculations be affected by recent market movements?
The hope is that in cases like these, all industry players will focus on working collaboratively and effectively to minimise disruption in a way that reflects positively on the reputation of everyone involved. This should be the priority. If it becomes necessary to think about legal fallbacks, issues such as whether contracts contain so-called "force majeure" or disaster recovery clauses could come into play.
Just as importantly, it is sensible to consider how decision-making can be sustained through a potentially extended period of dispersed or remote working or potential non-availability of key personnel.
Helpfully, scheme constitutions often contain wide provisions allowing delegation, subcommittees, remote or short-notice meetings, and sometimes even the appointment of 'alternate' or proxy officers to step in if a principal decision-maker is indisposed. All of these provisions may now be worth dusting off. Care is needed in the investment space, where there are additional statutory restrictions on delegation. Legal and investment advisers can assist here.
Contributions and covenant
Unlike the 2008/09 credit crisis, Covid-19 is being experienced as a rapid shock to the real economy.
Defined benefit schemes in particular will need to be alive to the pressures this may bring for sponsoring employers. Previous covenant analysis may now need revision. Intensive discussion and tough judgment calls may result, particularly where substantial contributions are coming up for payment in the short-term. Just as in the wider world, talk of payment holidays may now be starting.
For trustees, these issues will involve a very delicate balance between:
- the affordability of contributions and the value of ongoing sponsor support to the scheme; and
- their core duties around funding and security for members' benefits. This includes thinking about questions of member outcomes in a potential insolvency.
A priority, in the developing regulatory context, is for the scheme to be treated equitably as a stakeholder and a creditor in the business.
Where appropriate, the scheme funding legislation allows "revisions" to recovery plans and schedules of contributions between valuations. The Pensions Regulator is also under a statutory duty to exercise its supervisory functions over scheme funding in a way that minimises adverse impacts on an employer's sustainable growth - language which has permeated previous funding guidance. If major restructuring is on the cards, again, there are well-established conceptual and legal frameworks for working this through. However, any case for sponsor flexibility needs to be tested thoroughly, including by comparison to the position of other stakeholders, and genuinely justified. Further industry guidance may be helpful here.
Saving and decumulation
For defined contribution schemes, communication will be critical. While care is needed in order to navigate Financial Conduct Authority advice and financial promotion rules, it is feasible to provide genuinely useful information.
For example, it's possible to re-signpost available information about investment options: some members may be wondering about their holdings in equities, while others may soon be approaching the transition into non-return seeking stages of lifestyling strategies.
Members looking to access their benefits in the short term face a potentially difficult and unappealing choice, especially if they were not in a lifestyling strategy. Details of their decumulation options and where to get advice and support could be another area of focus. Might such members want to postpone their retirement, and could they do so? Aside from an automatic lifetime allowance test at age 75, there is no longer a tax requirement that forces decumulation, but some older schemes may still contain legacy rules requiring benefits to be taken by a certain age. Now may be a sensible time to check for and relax these provisions.
None of the above means the current situation is easy to deal with. Above all, however, trustees should be reassured that the law does not expect the perfect answer every time. The duty is to judge situations as objectively as possible, aiming to reach a rational conclusion on the basis of sensible, relevant information and professional advice where appropriate, as well as being prepared to review decisions as things develop.
Collectively across the industry we have a wealth of expertise and experience that we can draw upon to respond to the current challenges if we choose to. True collaboration between trustees, sponsors, advisers and service providers will bring the benefits of deeper working relationships which will help all of us step up. We may be in self-isolation for a while, but we should remember we're all in this together.
This article was first published in Professional Pensions.