Corporate insolvency: the pension scheme secretary’s role
By Tina Rushworth, Senior Pensions Consultant
As even some of the largest companies struggle with the financial impact of the coronavirus pandemic, pension schemes that rely on a flourishing sponsoring employer will be thinking hard about what they should do to both help the sponsor and protect their members.
As scheme secretary of the Carillion group of schemes, the most important lesson I learned from the collapse of a high profile sponsoring employer was to put contingency plans in place early. Existing good practice makes it easier to implement contingency plans when the need arises – and it helps to have a good scheme secretary in place who understands the scheme and the way that the trustee board works, or to appoint one if that role is not already filled.
Of course, every pension scheme and sponsoring employer is different. This makes it important to appoint the right specialists and professional advisers, who will be able to help manage and mitigate risks to the scheme.
Managing a crisis in the early stages
An effective scheme secretary must be diligent, methodical and organised, with the ability to properly and clearly record trustee considerations, decisions, actions and references to specialist advice in real-time. They must bear in mind that regulators and the public may be reading their minutes and records at a later date, should the worst happen.
Carillion announced its first profit warning on 10 July 2017. At the time, I was scheme secretary to a board of 16 trustee directors and a company-appointed trustee of a trust-based defined contribution (DC) plan. Although it would be a further six months before the company was placed in liquidation, it was at this point that the nature of my work changed to almost daily liaison with The Pensions Regulator (TPR), appointing additional advisers and responding to concerns and queries from scheme members.
Some of the things that need to be considered at this stage are:
- ascertaining whether you have enough support – and whether there is extra resource that can be made available, potentially at short notice. External help should be sought where necessary;
- checking that the relevant skills are in place amongst the trustees to handle a financial restructuring, potentially appointing a specialist independent trustee;
- implementing an incident response plan, or drawing one up if there is not one already;
- considering how trustee meetings can be convened at short notice and in line with social distancing requirements, including checking the trust deeds to ensure that electronic meetings and decision making are permissible;
- checking the validity and enforceability of Pension Protection Fund (PPF) guarantees and other guarantees, and keeping these close to hand;
- monitoring the sponsor covenant together with covenant advisers, taking into account TPR’s guidance and the integrated risk management framework;
- preparing for questions from TPR and maintaining full notes from any meetings. Ensure that there is equivalent representation of your team in meetings and on calls with more than one TPR representative;
- establishing specialist trustee training arrangements to cope with insolvency or restructuring issues, and perceived or actual conflicts of interest;
- implementing a policy for how the trustees should communicate with scheme members, perhaps using an online portal;
- agreeing with the sponsor that they will fund all additional expenses the scheme will incur in connection with corporate events such as restructuring;
- monitoring transfers out of the scheme and reviewing benefit options – you will wish to protect the scheme’s funding and remaining members, and to ensure that there isn’t a ‘run’ on the scheme;
- recording scheme costs and payment of invoices, particularly if the company re-charges the scheme costs, and organising all records and filing. Any correspondence between the sponsor, trustees and TPR should be maintained in an accessible manner;
- opening up a dialogue with the PPF and getting them involved with contingency planning for entry into PPF assessment may be helpful here.
Managing a crisis as insolvency looms
For the scheme secretary, the busiest point is before insolvency actually occurs and the PPF takes over. Here is where your preparations outlined above will pay off.
However the crisis has arisen – whether due to pandemic, a consequence of adverse trading or being subject to a corporate transaction – the following tasks are essential:
- moving payroll and banking facilities to a third party if required, and select a preferred provider;
- ensuring you have a way to access member data and files held on the sponsor’s servers. Once administrators move in, it may be difficult or impossible to retrieve data from a corporate server;
- insisting that PPF invoices are paid if the sponsor usually pays on behalf of the trustees. The finance director’s priorities will not normally be the pension scheme’s priorities;
- providing the trustees with an agenda including regular funding updates, factor reviews and insufficiency reports.
It goes without saying that confidentiality is paramount. Confidentiality agreements should be in place, and trustees must be clear on their responsibilities in this regard.
The next step is to ensure the right governance is in place. It will be necessary to:
- review whether any change in covenant as a result of the ‘trigger event’ affects how the scheme deficit can be supported by the employer and what actions – including investment actions – are needed as a result;
- monitor the corporate dividend policy, and any changes to it. TPR will be involved if the company prioritises dividends over scheme deficit contributions;
- establish a corporate events committee with powers to negotiate with the sponsor, the advisers and the regulators, free of conflicts of interest and with good knowledge of finance issues;
- plan how continuity of decision making and authorised signatories can be maintained in the event of losing a number of trustees suddenly;
- update the risk register and implement any highlighted actions. In practice, few keep these documents up to date – not many foresaw a pandemic, for example;
- explore the provisions of trustee liability insurance and check whether insurers need to be notified at this point;
- follow any investment, funding and covenant actions in your integrated risk management plan and contingency plans;
- model the implications of any proposals that the sponsor is likely to make with regard to funding, a recovery plan or changes to the investment strategy relative to the covenant.
Saving cost and duplication of effort is good if you can achieve it. One potential way of doing this is establishing a shared information portal to store governing documents, member communications, policies, benefit specifications etc. It is a good idea to ask your legal advisers to host and administer this portal, particularly for a large-scale liquidation which may be of future interest to a parliamentary select committee.
Managing a crisis once insolvency occurs
Administrative continuity ahead of any transition to PPF assessment should be a priority. If you have done your contingency planning well, this should go as well as it can.
Now, you should:
- review the scheme’s cash retention policy to ensure that pension payments can continue for at least six months, giving the PPF time to appoint its preferred administrator and transition administration to the new provider. Accurate cashflow projections will help this process;
- implement plans for transferring member data and files if they are held by the employer, and instruct the current pension administrators to cease all transfers out and administer benefits in accordance with PPF requirements;
- ensure all records of when employers joined the scheme and when they ceased to participate are up to date, to assist with the PPF’s validation process.
Remember that the PPF will need to approve any scheme expenses from the assessment date onwards.
Transition to PPF assessment
Being aware of what happens from day one in PPF assessment will help trustees to get to grips with their obligations so training on this, and the different types of insolvency and their impact on pension schemes, is worth doing. Of course, understanding your scheme and its sponsors is essential so that you can identify which entities have to have an insolvency event before PPF assessment kicks in.
Once PPF assessment arrives, the focus of scheme governance changes from demonstrating best practice in all areas to more process-driven, codified governance.
The PPF operates in a different way to usual best practice. Decisions are quicker and based on codified rules, with the aim of moving assets into line with the PPF’s investment strategy and getting the scheme accepted into the PPF as quickly and cheaply as possible.
The PPF has the power to replace the scheme trustees with its own panel trustees. Where this happens, the scheme secretary will need to help facilitate the appointment of the new trustee and help with a smooth handover. Once appointed, the new trustee will have well established guidelines to follow to ensure as smooth a transition for the members into the PPF as possible.
Your scheme reference manual will help the new trustee get to grips with the scheme, as well as enabling ceding trustees to record any relevant matters they wish to before they go. If you set up an electronic portal for storing scheme documents and correspondence for future reference earlier in the process, this is the point at which you should upload any final documents that you believe may need to be retained.
Keeping the lines of communication open
Throughout the entire process, it will be important to communicate with scheme members, TPR and your advisers as soon as possible. Develop a media strategy, and ensure that your messaging is centralised and coordinated. A ‘cascade’ policy should be put in place for giving and receiving information for the trustees, which helps if only the chair is in the thick of the negotiations. This method is fast for communicating back and forth, and can work at all times of the day and night.
Make sure correspondence with members ahead of PPF assessment clearly flags up the risks and potential for scams on transferring assets out of the scheme. Your communications should help members who ask for transfer quotes understand the risks and the true value of giving up their pension and compensation that will be available from the PPF should they keep their funds invested in the scheme.
Engaging a PR consultant may also be useful here. They are often able to find out what will be published in the press ahead of publication, and can ensure that consistent information is released in order to stop scheme members panicking. In a large insolvency, most information gets to members through the television, social media, news sites and newspapers.
After social media and news outlets, the next port of call for members is the scheme administrator, scheme website and HR representatives. Having an FAQ document that is updated regularly is essential. Your pre-agreed communications strategy will help to manage this process.
Have a pre-prepared statement drafted depending on the outcome of negotiations the night before any announcement is made. This will probably be a holding letter to members unless the scheme has entered immediate PPF assessment. If assessment has occurred then there are standard letters provided by the PPF which can be sent. Your legal advisers can help with this.
17 Jun 2020