DRC deferral requests: Being flexible without being complacent
As governments around the world have introduced various containment measures to combat the pandemic, the detrimental impact on the financial position and performance of businesses is becoming increasingly obvious.
These actions have contributed to disruptions in corporate supply chains, constrained operations where staff must work in close proximity and has supressed or, in many cases, collapsed demand levels from end consumers. These dynamics are contributing to material and fundamental liquidity constraints for many businesses, particularly those with higher operational or financial leverage.
Government policies relating to job retention, tax deferral and soft lending are critical in providing support for business continuity. Furthermore, with insolvency threatening many hitherto healthy companies, amendments have been made to certain aspects of UK insolvency law to encourage businesses that have been adversely impacted by the outbreak of COVID-19 to take time to assess the impact of the pandemic rather than quickly shutting their doors.
But these measures alone may not be enough and are unlikely to continue in the same way beyond the near term. Increasingly, DB pension scheme trustees are being asked to help by providing flexibility over contributions – in effect, to help fund the sponsor.
Whilst sponsors will remain cognisant of their pension scheme obligations, cash conservation will be the primary objective for many both today and during any “bounce-back” period post COVID-19. This dynamic is likely to continue to give rise to deferral requests from sponsors as a mechanism to help manage liquidity constraints.
As a Trustee what should I be doing?
Against the backdrop of the developing pensions regulatory landscape, deferral requests should be considered carefully by trustees of pension schemes before being accepted or rejected. Whilst contribution deferrals can help protect the long-term viability of the sponsor, pension scheme trustees should ensure that flexibility does not lead to complacency and that any deferral is in the best interests of their members.
As a minimum, we suggest:
- Trustees need to be aware that even short deferrals can set a precedent and that whilst flexibility is important, care must be taken not to be complacent about obtaining protections in view of downside risks;
- Equitability of treatment of the pension scheme remains a key area of concern for TPR so trustees should ensure that contributions to pension schemes are not being deferred to the benefit of other stakeholders;
- Contingency plans that trustees are willing and able to execute should be developed; and
- Decision making should be clearly documented.
To defer or not to defer may be the pressing question now, but it will remain throughout the remainder of this year and the next.