This guidance has undergone a significant re-write to consolidate previously published guidance. It provides an update of the Regulator’s view of the impact of COVID-19, and explains how the Regulator will continue to adapt its approach in providing guidance for trustees dealing with difficult decisions. The Regulator has taken on board feedback from employers, trustees and advisers, and has provided additional guidance on some of the practical challenges that trustees and employers face. It states that, although it continues to monitor the situation, it does not anticipate further updates to the guidance unless circumstances change significantly.
The Regulator recognises the challenging position many trustees have found themselves in and that they have had to make some difficult decisions. It states that if hindsight proves that trustees made the ‘wrong’ call, they will be able to defend their decision if they have obtained as much relevant information as they reasonably could and have taken professional advice where appropriate. They should also act in accordance with the provisions of the trust deed and make fully recorded decisions in good faith.
Key points in the updated guidance are outlined below.
Suspending or reducing contributions – the Regulator’s evidence suggests that around 10 per cent of schemes have agreed a temporary suspension or reduction of deficit repair contributions (DRCs) so far. With some schemes in the process of discussing possible extensions to suspension or reduction arrangements, the Regulator acknowledges that trustees will be approaching these requests from a position of greater understanding of the employer financial position including short-term affordability.
Discussions with lenders and other creditors are likely to have progressed and employers are now more likely to have financial projections as part of an updated business plan which reflects their view of the likely impacts of COVID-19. As such, many trustees should be able to review in more detail the business case for a new or continuing suspension or reduction of contributions to ensure it is appropriate and the scheme is being treated equitably. The Regulator does not expect trustees to unquestioningly extend their original suspension arrangements on a three-month rolling basis. Most trustees will be able to undertake due diligence on the employer’s financial position before agreeing a new suspension or reduction.
Valuations due to be finalised – although valuation assumptions may have been set under very different conditions, the Regulator does not necessarily expect trustees to revisit them. The Regulator maintains its position on not requiring trustees to allow for relevant experience since the effective date of the valuation in their recovery plan. However, it does expect trustees to consider whether the post-valuation experience is relevant when agreeing the recovery plan in the context that the employer’s affordability may now be constrained.
Transfer values – June 30, 2020 marks the end of the period during which the Regulator said it would take no action regarding breach of the statutory requirements if trustees decide to suspend CETVs. Breaches should be reported from July 1, 2020 but the Regulator will continue to take a pragmatic approach to those caused by COVID-19 issues. If COVID-19 presents issues for trustees, the Regulator suggests they should take legal advice and consider taking advantage of the existing flexibility in the legislation which provides for additional time (up to three months) to issue CETV quotations for reasons outside their control.
Covenant monitoring and contingency planning – the Regulator has published a list of questions which it hopes will help trustees understand risks to the scheme’s sponsoring employers and assist in covenant monitoring.
Trustees should consider the likely significance of the impact on the scheme in line with the Regulator’s guidance on integrated risk management. They should also consider whether contingent assets may be available to support the scheme, particularly if the employer is seeking concessions from the scheme.