Uncertainty remains, but trustees hold key to protecting savers

We are living in challenging times and being the trustee of a pension scheme is no exception.

Managing the retirement outcomes for savers is a role with tremendous responsibilities and we are alive to the workload trustees are facing.

Some of that workload stems from a positive place as new legislation comes into force that is designed to protect savers. While change can feel disruptive, we believe the powers created under the Pension Schemes Act 2021 go a long way to empower trustees to better protect savers and deliver stronger outcomes.

But some of the pressure facing trustees stems from a more nebulous place; from the economic uncertainty caused by the pandemic, from the disruption to supply chains, the increased cost of raw materials and the instability of energy markets, all of which could impact employer covenant or investment performance and choice.

However, the conditions we are seeing on the ground are generally far more benign than perhaps feared. The government assistance to employers impacted by the pandemic has been very successful in ensuring that levels of corporate distress have been kept at far lower levels than might have been expected early in the pandemic.

However, for some of those employers whose sales were impacted, the effects are present in levels of debt. This can reduce capacity to absorb the impacts of the sort of challenges currently starting to be seen. For some this may translate into a threat to their ability to fund pension schemes.

Most temporary government protections have now been withdrawn, and the future remains uncertain. We cannot predict with accuracy if, or when, we may see an increase of insolvencies. More likely in the short term is a continued increase in the Mergers & Acquisitions (M&A) and restructuring activity we have already been seeing. Both can bring fundamental change to the position of the employer which could pose a threat to the support provided to pension schemes, and to scheme funding, as other stakeholders seek to protect their interests.

In this environment, we look to trustees to be vigilant. Strong, open relationships with employers are essential, ensuring trustees keep appraised of the health of the employer and any potential strategic changes to their position. Assessing risks to the employer and contingency planning for their response will ensure that trustees are ready to react promptly to protect members’ interests, should risks materialise.

We remain clear that trustees are the first line of defence for savers. We, as the regulator of workplace pensions, will support trustees where appropriate. But we will use the full force of our enhanced powers if we feel a scheme is not being treated fairly by a sponsoring employer, or if a trustee board is not acting in the best interest of savers.

Planning for risk

We’re reminding trustees what they can do to prepare for emerging risk. As part of our latest regulatory initiative, we have contacted more than 400 defined benefit (DB) pension schemes to check they have considered the risk that their sponsoring employer’s ability to support the scheme has weakened.

We used external analysis, together with our own scheme information, to identify employers that may be less able to support their DB scheme due to the impact of the pandemic and on-going economic uncertainty. We have now written to 411 schemes to check they have considered, or are going to consider, our Protecting schemes from sponsoring employer distress guidance.

Initial indications are positive. In total, more than 73% said they have read and considered our guidance with their advisers. Of the remaining schemes that did not consider the guidance, we are working with them to ensure they also consider any risk.

A small number (5%) said they do not consider their covenant has weakened. They have been asked to provide evidence to demonstrate this and some may be investigated further. We are following up with those that did not engage with the process at all.

We also carried out more in-depth engagement with an additional 30 of the schemes most at risk from a weakening covenant to understand in greater detail the impact of the pandemic and what is being done to protect savers. As a result, we have so far opened nine cases (eight from the smaller group of 30 schemes and one from the main group) to investigate whether it is appropriate for further action to be taken to protect savers.

The power of the Act

Some have questioned whether the threat of our new criminal powers will scupper M&A activity amid fears that one wrong move could lead to hefty fines or even jail time.

Employers who are doing the right thing should not be worried about these new powers, which give us more options to punish wrong-doers. We hope their existence will be a deterrent in themselves. We are also exploring how our new information gathering powers may be used for our existing cases.

Will the new powers shift the balance between employers and trustees? It’s too early to say for sure. But initial feedback we have received suggests the new powers are resulting in better engagement from employers and other stakeholders with the pension scheme.

We think good engagement with pension scheme trustees should have been “the norm” before, but we’re glad the new powers may be helping to redress the balance of power where schemes’ interests have not been appropriately respected, and put trustees firmly at the negotiating table.

Of course, it’s not just criminal powers which will help improve outcomes. The Act brings in a broad package of powers relating to DB funding, notifiable events, investigation and information gathering, as well as high fines.

Trustees have a pivotal role to play. We are there to support them through guidance and enforcement action if needed. Together we can – and must – ensure savers remain at the heart of all we do.