TPR Warns Trustees to Prepare for Plan Sponsor Distress

Regulator says trustees must act quickly to protect savers if they spot warning signs of an employer’s financial difficulties.

The Pensions Regulator (TPR) has published guidance urging trustees of UK defined benefit (DB) plans to begin preparing for the possibility that their sponsoring employer is in financial distress.

TPR said that despite government economic support packages, COVID-19 continues to have a “profound impact” on the economy, including plan sponsors and the pensions industry. The regulator is calling on trustees to act quickly to protect savers if their employer is in financial distress or facing insolvency. It said trustees must actively monitor their employer’s health to look for warning signs, and should also be prepared for any issues related to Brexit.

The guidance from TPR is intended to help trustees prepare for possible financial difficulties of their sponsors by providing methods for risk management with workable contingency plans.

“When sponsoring employers experience financial distress or make business disposals, it can cause significant risks to DB schemes and we know that, sadly, in the current climate, some employers are struggling,” Mike Birch, TPR’s director of supervision, said in a statement. “The current environment is also leading to an increased level of corporate transactions, some of which are completed in response to distress.”

Birch said “trustees are the first line of defense for savers” and “should know the signs of distress,” adding that “preparations can be made before these signs appear.”

He said trustees should monitor their employer’s trading and, if the company seems to facing restructuring or refinancing, the trustees should have open discussions with the employer and other stakeholders to make sure the pension plan is being treated fairly and to protect the interests of their members.

The guidance includes examples showing how a plan’s position can be worsened by corporate activity or sudden changes in fortunes. According to the guidance, key warning signs of financial distress may include cash flow constraints, credit downgrades, removal of trade credit insurance, disposal of profitable business units, and a loss of a key customer contract.

According to the guidance, all trustees should adopt a fully documented integrated risk management approach to their plan, which TPR said will highlight problems early on. The regulator emphasized that the sooner trustees act, the better chance they have of protecting the plan’s position. It also said trustees should regularly review the risk management and governance procedures.

The key points of the guidance include:

  • Trustees should engage regularly with the sponsor and with other creditors, if applicable, to identify and manage key risks early on;
  • If trustees delay setting plan protections in place, other stakeholders, such as lenders, will be in a better position to exert control over and extract value from a distressed sponsor, potentially to the detriment of the plan;
  • Trustees should be aware of pension scams or unusual transfer activity and prepare a communications strategy to support members when they are facing uncertainty; and
  • If a sponsor is facing the prospect of insolvency, trustees should refer to the Pension Protection Fund (PPF) contingency planning guidance.

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