When failure is not an option

Managing pension liabilities in a post COVID-19 world

Many big-name businesses have failed since the world changed at the start of 2020. It’s easy to recount the news headlines we’ve all seen since the COVID-19 pandemic hit the UK in early 2020. But we must not forget the many more smaller names that will also face collapse.

Behind the changing face of our high street there are liquidators looking to tie up the loose ends. These loose ends include ensuring that pension liabilities are safeguarded for former employees. So what options are there for pension liabilities? And will we see pension providers changing their marketing strategies to try and salvage something from 2020 and find a home for the pension benefits of individuals who have lost their jobs as a result of the pandemic?

Defined Benefit: a clear path to follow

If you are a Trustee or Sponsor of a Defined Benefit (DB) plan, you will already be across the detail of the Pension Protection Fund (PPF). Launched in 2005 in response to several high-profile businesses failing with insufficient funds to meet their DB pension promises, the PPF protects people with an eligible DB pension when an employer becomes insolvent. The PPF is a safety net for DB members, ensuring that beneficiaries will receive at least a decent proportion of their promised benefits in the event of insolvency. It might not be perfect, but it’s a well-trodden path. But what about Defined Contribution (DC) plans?

Defined Contribution: what’s the best outcome for members?

The actions for Trustees of single trust DC plans where the sponsor finds themselves in financial difficulty will vary depending on the Scheme’s Trust Deed and Rules. Depending on how the DC plan is structured, it may be an option to secure buy-out policies with an insurance company in members’ own names once wind up has been triggered. Of course, much will depend on the timing of any action taken by the sponsor and whether any participating employers remain covered by the plan.

Nevertheless, we do anticipate that there will be several deferred only DC plans resulting from the inevitable redundancies of the current climate. These will span both own-trust DC plans and contract-based or Group Personal Pension plans. Member administration fees for individual DC pots can vary greatly. The question is whether there will be options available to move these deferred only DC plans to support optimal member outcomes and give members flexibility and reasonable fees for their pension savings.

Trustees and Sponsors alike have the members’ best interests at heart. Surely looking for the best value, fit for purpose replacement vehicle for their pension savings is a priority.

It is recognised that Master Trusts typically offer better value for savers than some of the other alternatives available. Currently there are only a handful of Master Trusts prepared to accept deferred only schemes – and most of them are looking for sizeable assets under management to accept the transfer. Anecdotally we have heard of at least one provider who will likely position themselves as a Master Trust of choice for deferred only schemes. Is there an opportunity for Master Trusts to offer a good value option for members and businesses who have suffered from the current economic situation?

But what about the businesses that won’t fail?

We remain positive that the current recession will turn around and there will be recovery more quickly than previous recessions. But the world has changed, and businesses need to adapt and look at ways to make savings. Running your own pension scheme Trust is costly, both from a financial and time perspective. Maybe now is the time to look again at your pensions roadmap?

If you have a DB plan, have you thought about your endgame? That might be buy-in, buy-out or consolidation options.

Similarly, for DC plans now is a great time to look at whether you and your employees are getting the value for money.

Master Trusts have been gaining ground as the DC vehicle of choice since the introduction of auto enrolment. That move is expected to accelerate. Master Trust providers proved their ability to uphold a seamless service during the COVID-19 pandemic. They moved quickly to communicate with members, reassuring savers of the long-term nature of pension investments as fund values fell. Many also offer access for members to additional financial education and tools to complement the pensions modellers. And we are seeing innovation in investment strategies and member portal technology too. There are opportunities out there for sponsors to make savings for themselves and their employees, reduce their governance burden and provide a leading-edge pensions solution for their employees fit for a post COVID-19 world.

Here’s a quick checklist for Trustees & Sponsors to consider during these challenging times:

  • Engage and collaborate early. Understanding the changing covenant of the sponsor is important for managing an on-going scheme. Collaboration is key when planning the pensions roadmap, especially DB endgame.
  • For DC Schemes: Are your members receiving adequate communications during this difficult time? Members need information about the decisions they might be making as fund values fall. We have seen great examples from some Master Trusts of timely and relevant communications. As an own-trust DC Scheme can you keep up with this level of communication?
  • Consider benchmarking your Scheme costs. If you have your own trust have you looked at your TPA costs recently?
  • Are your members getting value for money? The charge cap exists for the default fund of occupational pension schemes to ensure charges levied on members are reasonable, how do the costs of the self-select funds in the scheme compare? Do members have access to member portals and financial information and tools to help them make decisions? Look at how the scheme for your employees compares to alternatives out there.

To discuss any of these points contact Tina on 020 8213 5860.

Look out for follow up articles in the series where we will look at how employers can recognise and provide additional benefits to employees more cost effectively.

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