As the impact of COVID-19 continues to unfold, there are several legal issues which pension scheme trustees need to consider. During this difficult and uncertain time, The Pensions Regulator (TPR) has issued a statement with advice for pension trustees. You can access TPR's guidance here.
Effect on schemes
COVID-19 has had a profound effect on global financial markets. Stock markets have experienced losses amounting to trillions of pounds. Depending on how a scheme's assets are invested, this could be having a significant impact on scheme funding.
Defined benefit (DB) schemes
DB scheme trustees must continue to fulfil their duty to review the status of their employer covenant. Depending on the sector of the scheme's participating employer, COVID-19 may negatively impact covenant strength. Being alert to possible financial strain faced by the scheme's participating employer, and maintaining good contact with the scheme's investment advisors, is essential. This will allow proactive action (for instance, securities) to be taken when/if necessary.
Defined contribution (DC) schemes
DC scheme trustees also face challenges. Whilst it is the members who bear investment risk in DC schemes, the market distress will have implications for the scheme's default fund and the participating employer. An adverse effect on the scheme's default fund could result in members' pensions shrinking (compared with pre COVID-19), some members may even consider postponing retirement. There is a possibility that claims against trustees will be lodged by members in due course, if this is the case.
Practical measures for pension trustees
What measures can pension trustees put in place to mitigate risks, and ensure that their scheme is in the best possible position to meet potential challenges encountered as a result of COVID-19? TPR has made it clear that it expects Trustees to have appropriate monitoring and contingency planning in place and to be alert to risks that would have a significant consequences for their scheme and members. Trustees should therefore update their scheme's contingency and business continuity plans (BCP).
To secure the scheme's administration can continue to run smoothly, trustees should also put measures in place for:
- mitigating any under-resource which may arise, for example, as a result of increased work volumes or unavailable staff. TPR suggests that trustees should also establish which scheme activities would be prioritised in the event of any such under-resourcing;
- keeping data updated, backed-up and available;
- processing of key scheme financial transactions;
- understanding their service providers' business continuity arrangements; and
- maintenance of IT hardware and software and test systems.
Trustees should continue to review their scheme's BCP in view of the changing COVID-19 situation.
If you would like to discuss anything raised in this blog, please get in touch with your usual contact at Brodies.