Between 10% and 15% of U.K. defined benefit fund trustees have received or expect to receive a contribution deferral request from their sponsoring employers, as the impact of the coronavirus pandemic on companies intensifies.
And while the general consensus is that about 10% to 15% of pension fund trustees will be dealing with these requests over the coming weeks — with employers generally asking for a three-month contribution holiday — that proportion could reach almost one-fifth of companies, retirement advisory firm Isio Group Ltd. warned. Companies are making the move to pause pension contributions and other financial commitments, with some firms asking employees to take temporary pay cuts, as they work to keep balance sheets as healthy as possible and manage cash flow amidst unprecedented stress in the economy.
A recent survey of its clients showed 12% of sponsoring companies have requested suspensions of deficit reduction contributions — set cash injections promised by the company to help plug a pension deficit — with 6% already accepted by trustees and a further 6% under consideration. Isio said another 7% of sponsoring employers are considering suspensions but have not yet approached their trustees.
"The starting point is that employers are legally obliged to pay the contributions set out in the Schedule of Contributions," an agreement between the sponsoring employer and the trustees that shows contributions payable to the pension fund and any additional contributions from the employer under any deficit recovery plan, said Tamara Calvert, a pensions partner at law firm DLA Piper U.K. LLP in London. "Any request from the employer to suspend or delay payment of those contributions requires careful consideration by trustees."
The onus falls on the sponsoring employer to provide sufficient financial and management information to help trustees to decide whether they will agree to the suspension of deficit contributions.
"The key question for trustees is whether (by) agreeing to the suspension or deferral they are materially reducing the chance of recovering that money for the benefit of the scheme. Trustees need to get themselves comfortable that they are still reasonably likely to get the money, in due course," Ms. Calvert said. And if they are not comfortable, they can reject the request to suspend contribution payments.