Pensions Regulator signals increased support for trustees in economic downturn

by Dr. Ros Altmann

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19th April 2009

Pension schemes on life support – critically wounded partly by Government policy
UK final salary schemes are, in many cases, currently on life-support. The credit crisis has critically wounded our pension funds. Market falls have undermined the assets. But the Government has twisted the knife by artificially inflating the liabilities. In fact, by forcing gilt yields down to artificially depressed levels, just when pension schemes have to calculate their official three-year funding position, the Government has launched another raid on our pension schemes.

The latest figures from the Pension Protection Fund show that schemes in deficit have a shortfall of over £250billion at end March 2009! Against this background, the Pensions Regulator has been trying to protect the Pension Protection Fund (PPF). To do this, it needs to help trustees manage and overcome their scheme deficits – and also to be vigilant against sharp practices by employers trying to avoid their responsibilities.

Don’t bankrupt the employer if it has a viable future, as deficits could reduce again
Of course, the best thing for members is for the sponsoring employer to survive the recession and return to a position where it can support the scheme. Insisting on big contributions during a downturn may bankrupt an employer that could otherwise have a viable future. This will not normally be best for members, since they will end up in the PPF with reduced pensions.

The situation is going to be incredibly fraught in the next few months and the truth is that there are no easy answers. In fact, now could turn out to be one of the worst times to assess UK pension scheme deficits and the chances are that there could be some improvements next year, if interest rates go back up again and take some of the pressure of liability values. It would be ironic if Government policy to fight the recession ended up undermining what’s left of our top-class employer pensions.

Delicate balancing act for trustees – are they up to the task?
This is a very delicate balancing act for trustees. How do they know if the employer is just temporarily struggling and can eventually make up the deficit, or if it is going to fail anyway sooner or later, so trustees should try to get as much money as they can now to protect the PPF? The pensions of millions of British workers are at risk.

Are the trustees up to this task? Trustees really need to think like bankers. But they are not bankers. The pension fund is an unsecured creditor of the sponsoring employer. When renegotiating an unsecured loan, a bank would usually demand some security (perhaps a charge over company assets) or attach conditions such as being repaid first when business recovers. Trustees need to think along these lines too.

Unfortunately, many trustees are not used to this way of thinking. Some may actually be on the Board of the employer itself (and therefore potentially conflicted) and others are often member-nominated trustees – not finance professionals or pension professionals at all and they may well be frightened to challenge their employer too hard, for fear of their own jobs. Schemes with independent trustees should be in a better position to cope with the demands they are likely to face in the coming months, but not all schemes have taken on independent trustees.

Employers bound to be trying to cut costs and minimise pension contributions now
Employers will be looking to cut costs in this environment. They will try to put as little into their pension scheme as they can get away with in many cases. If trustees are too soft, this poses a big risk for both members and for trustees themselves. If the employer fails later, members end up with reduced pensions and if trustees have not done their utmost to secure contributions, they could be sued later for breach of trust. But, of course, if the employer fails now, then members’ pensions will be reduced anyway, so this is not straightforward!

Pension scheme often seen as a ‘soft touch’ – Regulator wants more whistleblowers
If trustees are in any doubt about whether their employer genuinely cannot afford to pay more, they should contact the Pensions Regulator. Employers often see the pension scheme as a ‘soft touch’. Sometimes the trustees are asked to approve very long recovery periods, transfers out which are not in members’ interests. Sometimes the employer may ask the trustees to invest in the sponsoring employer or lend it money – these all put members’ pensions at risk. The Regulator’s latest statement clearly indicates that it wants to be alert to the risk of fraud and also to help back up trustees. It is also inviting any professionals involved in running the schemes to ‘whistleblow’ if they have concerns.

Ideally trustees need independent financial and accounting advice, to assess the strength of the employer and to assess any proposals for transfers out. Just relying on the employer’s advisers is not good enough. Trustees who do not have the necessary skills to assess the sponsoring employer’s health properly should get outside expert advice as quickly as they can.

None of this is easy, but it is vital that a professional and strong approach is taken by trustees to protect their members’ pensions.

Dr. Ros Altmann
07799 404747

ENDS