Pension scheme trustees have been urged by The Pensions Regulator (TPR) to remain “vigilant” amid the current uncertain environment and to ensure that they are appraised of the health of sponsoring employers.

TPR executive director of frontline regulation, Nicola Parish, acknowledged that some pressure facing trustees “stems from a more nebulous place”, such as the economic uncertainty caused by the pandemic, the disruption to supply chains, and increased cost of raw materials and the instability of energy markets, all of which could impact employer covenant or investment performance and choice.

Despite this, Parish reassured trustees that the conditions TPR is seeing “on the ground” are generally far more benign than perhaps feared, suggesting that government assistance has been "very successful" in keeping corporate distress levels down.

“However, for some of those employers whose sales were impacted, the effects are present in levels of debt,” she clarified.

“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.”

Parish also acknowledged that TPR cannot predict with accuracy if, or when, there may be an increase of insolvencies, suggesting in the short term it is more likely there will be a continued increase in mergers and acquisitions (M&A), and restructuring activity.

She also warned that both of these can bring “fundamental change” to the position of a sponsoring employer, which could pose a threat to the support provided to pension schemes as other stakeholders seek to protect their interests.

Parish said: “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.”

In particular, Parish reminded trustees what they can do to prepare for emerging risk, suggesting that some schemes could take greater action on this.

She confirmed that, as part of its latest regulatory initiative, TPR contacted 411 defined benefit (DB) pension schemes to check they have considered the risk that their sponsoring employer’s ability to support the scheme had weakened and if they were going to consider TPR's Protecting schemes from sponsoring employer distress guidance.

Initial indications were positive, according to Parish, with more than 73 per cent of schemes stating that they have read and considered the guidance with their advisers, while the remaining schemes that did not consider the guidance, are working with TPR to ensure they also consider any risk.

One in 20 (5 per cent) said they did not consider their covenant had weakened, although TPR has asked for further evidence to demonstrate this, warning that some may be investigated further.

Indeed, Parish confirmed that more in-depth engagement with a further 30 schemes most at-risk from a weakening covenant has already led to the opening of nine cases, where TPR is investigating whether it is appropriate for further action to be taken to protect savers.

In addition to this, Parish addressed concerns that TPR’s new criminal powers could hinder M&A activity amid fears of jail time and heft fines, reassuring employers that those “who are doing the right thing should not be worried about these new powers”.

She also said that whilst it is too early to say for sure if the new powers shift the balance between employers and trustees, initial feedback has suggested that they 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," Parish continued.

"Of course, it’s not just criminal powers which will help improve outcomes. The [Pension Schemes] 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."

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