Before trustees allow employers to delay making contributions into DB schemes, they need to consider how they would ‘switch on’ payment mechanisms again.
This warning comes from LCP partner Steven Taylor. He says that deciding whether or not to allow an initial deferral of contributions is only part of the challenge facing trustees.
Guidance from The Pensions Regulator indicates that part of this process also includes giving serious consideration to the mechanism through which the shortfall will be recovered. This is unlikely to be a simple matter of waiting for the next valuation – which could be several years away — and taking account of any missing contributions in a new recovery plan at that point.
One area of increasing interest, especially with TPR focus on treating pension schemes ‘equitably’, is the idea of putting in place ‘triggers’ so that the missed contributions get reinstated as the company’s position improves.
This could include a requirement to pay contributions when free cash flow reaches a certain level, or when the company is in a position to start making payments to other creditors.
Similar ideas are reflected in the most recent Annual Funding Statement from TPR, and could form part of ‘business as usual’ for all schemes, but are particularly relevant where trustees are in the middle of deciding how to handle a request for deferral.
Taylor says: “Most trustee boards will be sympathetic to a sponsor in difficulty who comes to them with a request to defer contributions.
“But they also have a duty to think hard about how contributions will be switched back in future, and in particular about how they make sure that the pension fund is treated fairly if and when the position of the corporate improves.
“Contingent contribution arrangements that enable the scheme to get a fair share of the upside in company finances will need to be carefully designed but can help improve the long-term security of the scheme.”