PSA2021: What should trustees be doing with their covenant?

Much has already been said about what the new Pension Schemes Act 2021 (PSA 2021) will mean for The Pensions Regulator’s (TPR) ability to use its moral hazard powers. However, to-date, there has been limited coverage of what the new tests mean for trustees when monitoring employer covenant.

In part, this is the result of limited clarity being provided by either the Department for Work and Pensions (DWP) or TPR on how the new tests should be applied. While TPR has verbally suggested that the new Contribution Notice tests included in PSA 2021 are not intended to capture business-as-usual activity, proposed regulations set out by DWP suggest otherwise. Even fair value transactions are likely to be caught depending on what TPR considers to be “material” and “reasonable”.

More is expected in the year through a raft of new regulatory guidance. But, in the meantime, what should trustees and sponsors be thinking about now to protect themselves and their members?
First, trustees and sponsors must engage on what the new requirements will mean for their scheme. Improving covenant information sharing and trustee notification arrangements will reduce the risk of corporates inadvertently breaching updated requirements.

Secondly, trustees need to consider what corporate events are likely to be material to their scheme based on its current position and journey plan. For instance, events that impact affordability are less likely to be material to well-funded schemes where sponsor solvency may instead be the primary concern.

Finally, contingency planning will become even more important with trustees needing to plan for increased and efficient engagement with sponsors when corporate events arise. Part of this will be to consider what forms of mitigation would be beneficial for their scheme given the likelihood that a wider range of events will require mitigating.

Trustees may, for example, wish to consider using “pre-mortems” as part of their contingency planning (i.e. starting from an assumption that sponsor insolvency occurred, what should we have done differently?).

For more information contact Hamish Reeves.
This article appears in CQ2 – download the pdf to read the full document.

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