I read with interest the blog post by Nicola Parish, TPR’s Executive Director of Frontline Regulation, on December 8, 2021, where she warned trustees of DB schemes to be vigilant in the current economic climate. Nicola emphasised the need for strong, open relationships with employers and I think she is spot on with that comment. Whilst TPR’s stronger powers are still to be tested you might think that their existence would make trustees suspicious and nervous of any employer corporate activity and pit employers and trustees against each other. So it’s good to see TPR encouraging these strong relationships. What is needed more than ever in these challenging times is a positive partnership based on trust to promote the long term health of both the employer and the DB scheme. It’s early days so far for TPR’s powers, but what we’ve seen in our practice is encouraging with employers thinking carefully about the impact of, for example, dividends or share buy backs on DB schemes and openly engaging with trustees who, in turn, are responding in a constructive spirit and taking advice to reach a sensible commercial outcome. This need for a partnership is also evident in DB funding. Although we don’t yet have the DB funding code (pushed back to late summer), TPR is already encouraging trustees and employers to work together to come up with a long term funding target and journey plan to get there.
So all very positive for DB schemes with strong employer covenants. The point of TPR’s blog was to highlight the work TPR has been doing on schemes facing a deteriorating employer covenant and, in particular, checking that they have considered the regulatory guidance Protecting Schemes from sponsoring employer distress. The guidance contains a lot of practical advice on prompt engagement and developing a strategy on integrated risk management – focussed on understanding what levers trustees may have to pull and taking action before it is too late. But all of this preparatory work comes at a cost (which is recognised in the guidance as being uncomfortable) which may make little difference to member outcomes (and could in some cases worsen them if costs are being met from scheme assets or eroding DRCs). A situation where there is simply not enough money (and no guarantor or contingent assets) to meaningfully support the scheme and keep the business thriving (or just going) is a very tricky one for which there are no easy answers. Whilst the PPF obviously stands behind insolvent scenarios, what can be done for schemes in the twilight zone where times are tough for the employer but insolvency is not an inevitability in the short to medium term? Sadly it is difficult to see how legislation or regulation can help.
