Buckle up for a bumpy ride; TPR gears up for post-Covid action

The Pensions Regulator (TPR) has been very busy in recent weeks issuing a series of important publications to which trustees and sponsoring employers of occupational pensions’ schemes should pay careful attention as they provide helpful insight into the regulator’s concerns and strategic priorities for the next few years.

TPR Corporate Plan

First off, TPR published its three-year corporate plan which it said:

“…sets out our commitment to put the pension saver at the heart of what we do. This means savers who are building their pension pots can expect us to enhance the quality of their savings outcomes. Savers who have built up pension pots and are in or approaching retirement can expect us to protect the money they have saved.”

The plan identifies the regulator’s key priorities as:

• implementing the Pension Schemes Act 2021 (PSA).
• combating pensions scams.
• developing a framework for measuring value for money as TPR works to support trustees, sponsoring employers, and savers in recovering from the Covid-19 pandemic.

TPR says that future regulatory activity will be aligned to its five new strategic priorities of security, value for money, scrutiny of decision making, embracing innovation and bold and effective regulation. The plan then sets out a road map for some of the regulator’s future activities:

• In 2021-2022, TPR will extend its regulatory reach using new powers derived from the PSA (from October 2021) whilst also pursuing its ongoing supervisory and enforcement activities. TPR will continue to monitor auto enrolment and defined contribution (DC) provision.
• In 2022-2023, TPR plans to continue work using its new PSA powers and increase its focus on tackling cyber risk. It will maintain its work on supervisory activities, auto enrolment and DC provision.
• Between 2022 and 2024, the regulator will continue to work with pensions’ stakeholders to establish cross-industry standards and develop the pensions dashboard. It will continue engagement around defined benefit (DB) superfunds and collective DC schemes with both industry and government.

Annual Funding Statement

Hot on the heels of its Corporate Plan, TPR published its Annual Funding Statement 2021 (AFS).

The AFS is directed at trustees and sponsoring employers of DB schemes. It is particularly relevant to those schemes which have valuation dates between 22 September 2020 and 21 September 2021 and those undergoing significant changes that may require a review of their funding and risk strategies.

As the UK economy emerges from the Covid-19 pandemic, the AFS envisages trustees having to deal with employers who fall into one of three broad categories:

Covid-19 has had limited impact on the employer’s business

There has likely been no weakening of the employer’s balance sheet and cash flow has remained strong.

The initial impact of Covid-19 was material, but employer trading has recovered, or is recovering, strongly

As government’s Covid-related financial support comes to an end later this year, TPR anticipates that some sponsoring employers could experience short-term liquidity pressures.

In such circumstances, TPR says that trustees should carefully consider requests for lower employer contributions to the scheme and it will expect higher contributions in subsequent years to limit the overall impact on the length of employer recovery periods. TPR also warns that any reduction in scheme contributions would be inconsistent with dividend payments to shareholders.

The impact of Covid-19 on the employer continues to be material

For these employers, TPR notes that the pace of recovery could be uncertain and take some years. The employer balance sheet may also have weakened due to measures taken to raise additional funds.

It seems that relatively few employers have so far requested the suspension or reduction of deficit recovery contributions. But TPR reminds trustees that, in such circumstances, they should look to obtain suitable mitigations from the employer such as a suspension of dividends, equitable treatment of the scheme relative to other creditors and/or the provision of contingent assets or parent company guarantees.

Guidance for trustees

Overall, TPR’s clear message to trustees is that they must consider the long-term funding and investment strategy of the scheme, and how that is impacted by Covid-19 and Brexit, when seen against the scheme’s maturity and funding position.

TPR provides guidance on addressing these issues and sets out the actions that it expects trustees to take:

• Remain alert to the risk of weakening employer covenants as uncertainties remain following a challenging year for businesses. Trustees should monitor potential covenant leakage through dividend payments and put in place contingency plans to react appropriately to any changes.
• When carrying out actuarial valuations, trustees must review how the employer covenant might have changed in the past year and then continue to monitor it. TPR expects them to engage with employers.
• If there is a prospect of insolvency, or a restructure, of an employer, trustees should examine the covenant further and take specialist advice to gain a fresh view on covenant strength to ensure that the scheme is treated fairly.

Consultation on Contribution Notices

Finally, TPR has announced that it is consulting on changes to Code of Practice 12 which sets out the circumstances in which it will exercise of its power to issue a Contribution Notice (CN). This follows the introduction in the PSA of controversial new tests to be used by TPR in relation to CNs later this year.

TPR can issue a CN to ensure that sponsoring employers (and those connected or associated with them) do not avoid their pension liabilities by ordering them to pay cash into the DB scheme. This is one of the regulator’s so called ‘moral hazard’ or ‘anti-avoidance’ powers.

The PSA will significantly beef up TPR’s powers in relation to CNs. The Act introduces two new methods by which TPR can assess the impact of an act by an sponsoring employer that may have an financial effect on a scheme (for example, an increase in employer debt that weakens the scheme’s creditor position or the payment of a non-routine dividend to shareholders). These are the ‘employer insolvency’ and the ‘employer resources’ tests. They will supplement the existing ‘main purpose’ and ‘material detriment’ tests that are already applied by TPR when deciding whether to issue CNs.

As a result of the introduction of these new tests, TPR is updating the Code of Practice to explain the circumstances in which it will consider issuing a CN that is based on them.
TPR’s consultation runs until 7 July 2021.

Comment

TPR’s flurry of recent activity shows again that it is ramping up its work in support of its avowed intent to be clearer, quicker, and tougher in its regulatory activity.

It is using these publications to send clear messages to trustees, employers and their advisors in terms of TPR’s expectations as to conduct and areas of ongoing and future regulatory focus, especially in the wake of the challenges posed by Covid-19 for pensions schemes in the UK.

These messages should not be ignored, and if anyone in the pensions industry is in any doubt as to how they might be affected, they should take professional advice as soon as possible.