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UNEXPECTED EVENTS

Prepare for and respond to the unexpected; get back on track quickly

What do you do if the road is blocked and you have to take a diversion – or worse, your tyre explodes on the motorway? Unforeseen events can derail any journey. Pension schemes need to be prepared for a wide variety of events, ranging from corporate transactions that impact their sponsor’s risk capacity or affordability profile to market shocks that affect a scheme’s funding level. Effective governance, truly diverse investments, and good contingency plans will help you remain focused on protecting members’ benefits, even when the unexpected happens.

STAGE 1
CREATE PROCESSES THAT REACT
QUICKLY TO THE UNEXPECTED

Fine-Tune Your Governance Structure

Being able to respond to a new situation in an agile way requires good governance.

  • Does your scheme have the ability to consider an unexpected event carefully and in a timely way?
  • Can trustees, sponsors, and their advisors flex and respond as needed?
  • Does your corporate or trustee board have the knowledge it needs to make confident decisions, or is additional support or training needed?

Establish Contingency Plans & Defence Manual

A single document setting out how to respond to unforeseen events, whether they originate from your scheme or sponsor, can reduce valuable decision-making and negotiation time.

  • What scenarios might the scheme and sponsor need to prepare for?
  • Do you need to take expert advice?
  • Do you need to engage The Pensions Regulator?
Unexpected
Event

Execute Your First Response

Consult your contingency plan & defence manual to gauge next steps.

  • What advisors need to be engaged?
  • What member communications are required?
  • Will The Pensions Regulator need to be notified or engaged with?

STAGE 2
HOW DOES AN UNEXPECTED EVENT
IMPACT YOUR JOURNEY PLAN?

Assess Covenant Impact

Following a shock, it is key to establish whether the capacity of your sponsor to support your scheme’s risks and to make contributions has changed.

  • Has there been material economic or legal covenant detriment?
  • Can the new covenant structure support your scheme’s risks as set out in your agreed journey plan?
  • How is future affordability of your sponsor affected?

Determine Scheme Impact

Following an asset or liability shock the new funding level needs to be established.

  • How does this setback compare against your journey plan?
  • Does your investment strategy remain appropriate, or should it be adjusted to reflect the new circumstances?
  • Has scheme maturity been impacted?

Getting back on track

Taken together, what do changes to your covenant and scheme mean for your journey plan?

  • Do you need to revisit the balance between covenant support and investment risk set at your last valuation?
  • Are additional contributions or security required?
  • Should your investment strategy and risk profile change? If you are ahead of target, should you de-risk or keep your foot on the pedal?
  • Should you amend your end-game or long-term funding target?
  • How does the event impact your scheme’s categorisation in The Pensions Regulator’s 2019 Annual Funding Statement?
  • Are there greater doubts about the viability of scheme and sponsor?
TPR Annual Funding Statement 2019

STAGE 3
GETTING BACK ON TRACK

Prepare Your Negotiation Strategy

Further negotiations between the trustees and the sponsor may be required following a shock event.

  • The starting point for these discussions should be your agreed contingency plan & defence manual, including any pre-agreed actions.
  • Do the parties understand their negotiation strengths and weaknesses?
  • Seek expert advice to ensure a win-win strategy is agreed – remind yourself that it is usually in both the trustees’ and the sponsor’s interest to help the scheme along its journey.
  • Consider involving The Pensions Regulator, for example where Clearance is required.
  • How could your covenant support be augmented to better suit the new circumstances?
  • What options are available in the event of an impasse?

Implement Adjustments

Once agreed, any revisions to the covenant support structure, contributions profile, or investment strategy should be implemented swiftly.

  • Ensure legally binding documentation is put in place.
  • Alter the monitoring schedule and contingency plans to reflect new circumstances.
  • Communicate any changes to members.
Covenant Augmentation
Implemented
Investment Risk
Right-Sized
What Next?