Deficit repair suspension

The impact of COVID-19 on business and everyday life generally has taken everybody by surprise. The measures taken to contain the spread of the virus through social distancing and self isolation have been swift and severe.

How long these measures will last and in what format is completely unknown at this point. What is however undisputable is that lots of businesses are struggling as a result, with staff being either furloughed (a term that nobody had really heard of two weeks ago), laid off or working from home.

The impact on turnover and therefore profits is undeniable and therefore the ability of the employer to continue to make deficit repair contributions to defined benefit pension schemes must also now be questioned.

This increases the necessity for trustees to engage with the employer in order to better understand the impact on the employer’s covenant and the ability to continue to pay contributions to the scheme.

This needs to be considered in conjunction with any impact of falls in asset values in the scheme. Trustees should ask the employer the following in order to better understand the ongoing issues. Have they considered how the impact of the Covid19 and the measures to contain it may impact on:

• demand for their products and services
• their business continuity plan (BCP)
• is there a significant impact on cashflow?

The Pensions Regulator also recommends that the following issues should be considered:

  From the answers obtained above the Trustees then need to consider how likely it is that these will impact on the ability of the employer to meet their commitments to the scheme.

Deficit Repair Contributions

Given the present climate it is possible that the employer will request a deferral of deficit repair contribution payments. Trustees should consider whether such a request is appropriate given the current circumstances. Trustees should obtain the following information in order to assess the justification of any such request:

Is there a need?

• Understanding the employer’s cash-flow and trading issues and the main reasons for the request.
• Ensure that no other payments will be made to the likes of shareholders at the same time – this may include putting in place agreements to the effect that no new dividends will be paid until deficit repair contributions are brought up to date.
• Understand whether any other parties (banks, lenders etc.) are taking a greater security in the employer thus potentially worsening the security on offer to the Trustees. If this is the case Trustees should ensure that their security is also strengthened.

Timescales

• If you agree to a suspension then this should have a definitive end date as well as triggers to restart if trading returns to normal.
• The end date should be no longer than 3 months at the present time.

As you will have read in everything that you have seen in recent weeks these are very difficult times, the likes of which have not been seen for generations.

There is no standard template for what to do next and therefore in these circumstances the answer is continuous dialogue between Trustees, their advisers and the sponsoring employer.

Our offices may be closed but it is very much business as usual at Ascot Lloyd and so if you have any queries at all then please contact your normal Ascot Lloyd consultant who will be able to assist.

If you would like any more information on these matters, please contact your Ascot Lloyd consultant/contact directly. Alternatively, email: This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it.