Premier issues advice to pensions schemes for deficit recovery 'challenge'

Premier has outlined six tips for pension schemes to consider when looking at the deficit recovery impact of Covid-19, warning trustees that this will "be quite a challenge".

The tips follow recent analysis by The Pensions Regulator (TPR), which found that around one in five defined benefit (DB) schemes with 2020 valuations would have to more than treble their deficit recovery contributions (DRCs) to meet current recovery plans.

In addition to this, Premier chief actuary, John Herbert, highlighted that given the “wide-ranging" impacts of the Covid-19 crisis around the world, it is likely that deficits will be “materially higher” than many schemes expected.

He added: “As a result, the DRCs may need to increase significantly at exactly the moment the sponsor can least afford it.

“Assessing the impact, reviewing the options and approaching the sponsor are therefore likely to be quite a challenge."

In assessing the covenant position, Herbert urged schemes to ask for details of current business plans, and how the crisis has affected the business, clarifying that any previously published information is likely to be less useful.

Schemes must also understand what action the sponsor is taking to protect its business amid the pandemic, as Herbert stressed that pension schemes must ensure that they are being treated fairly and consistency with other creditors.

He added that pension schemes may want to seek specialist advisers or consider strengthening their trustee boards with expertise in this specific area going forward.

Herbert also urged schemes to undertake an independent covenant assessment, stating that this will be useful in supporting an understanding of the business, and whether any proposed contribution plans are genuinely affordable.

In addition to evaluating the covenant position, schemes were encouraged to consider the cash flow requirements needed to meet benefit payments, as well as whether any assets will need to be realised at suppressed values,.

Herbert added that any contribution plan should be specifically designed to minimise the negative impact from selling such assets.

He also clarified that if the short-term position can be managed then schemes should instead focus on long-term objectives and the strategy to get there.

However, Herbert emphasised that trustees must also consider the scheme position, and whether there has been a material shift since the last valuation date.

"Changes to the covenant position may be just as relevant as changes to the funding position," he concluded.

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