New TPR guidance for DB schemes on sponsor distress
The Pensions Regulator (TPR) has published new guidance for the trustees of defined benefit (DB) pensions schemes on employer distress.
The guidance, Protecting schemes from sponsoring employer distress, reminds trustees of TPR’s guiding principles of good practice, offers practical recommendations for spotting signs of corporate distress, and sets out what trustees should do to protect their pension scheme if these signs appear.
While the guidance is for the trustees of all DB schemes, it is most likely to be useful to the trustees of medium-sized and smaller schemes who have more limited access to professional advisers. The guidance is also designed to sit within the existing regulatory framework for DB schemes.
The backdrop to the guidance is the COVID-19 pandemic and the impact that measures to control the virus are having on businesses and the economy.
The guidance is set out in three key sections.
Best practice Integrated Risk Management approach
Trustees are recommended to take decisive action before a sponsor shows signs of distress to increase the chances of mitigating downside risk in the future. The guidance sets out the key steps trustees should already be taking as part of the proper governance of their scheme.
Sponsor showing signs of financial distress
The guidance gives the following examples of key warning signs of financial distress:
- cash flow constraints
- credit downgrades
- removal of trade credit insurance
- disposal of profitable business units
- loss of a key customer contract
However, it does point out that signs of distress can vary depending on the sponsor’s business and the industry the sponsor operates in.
Early engagement with the sponsor is encouraged as this can enhance the prospect of the scheme being treated fairly alongside other stakeholders, so that members interests are protected as far as possible.
Sponsor facing the prospect of insolvency
If a sponsor insolvency is looking likely, the guidance states that trustees should first take professional advice from specialist restructuring advisers to make sure that all options to protect the scheme’s position have been explored.
Where security structures are in place, trustees should make sure they know how to enforce the security, if all other options have been explored and insolvency is imminent.
Trustees are expected to be familiar with the Pension Protection Fund’s (PPF’s) Contingency planning guidance and engage with the PPF if a sponsor is expected to become insolvent, in order to understand what practical steps are needed to prepare the scheme for PPF assessment.
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