Many companies are frantically trying to manage their cash in the wake of Covid-19 as they focus on getting through lockdown, in the hope that some sort of normality will return in the relatively near future.
Every year in the UK, companies pay £10 billon into defined benefit pension schemes. Of course, it’s hugely important that pension schemes should be funded appropriately, and deficits in these pension schemes should be managed. However, what is even more important in a time of crisis is not allowing otherwise perfectly sound companies to fail.
Suspending or reducing payments
Our expectation is that around 10% of companies across the UK will look to suspend or reduce contributions to defined benefit schemes, equating to around a billion pounds.
At Mercer we run two different surveys that track the actions companies are taking in response to Covid-19.
They have found that a significant number of companies are in financial distress and looking to make changes to their contributions, with clients in the automotive and manufacturing sectors being the most likely to have initiated action. However, clients across all sectors in the UK have been affected and have considered this or are still considering it.
Most companies – 91% of those who have taken some kind of action – have chosen to stop rather than reduce contributions. Of those, 43% have suspended contributions for a three-month period, probably because of new guidance from the pensions regulator released in April. This allows trustees to agree on a three-month suspension or reduction in deficit repair contributions without full information from the employer covenant.
The remaining 57% have suspended contributions for more than three months. This will have required a much more detailed business plan and further information on the impact of the coronavirus on the company.
Is three months enough?
Any company with immediate cashflow issues should consider suspension or reduction of contributions to defined benefit pension schemes. The longer it takes for normal activity to resume the greater the collateral damage to the economy will be.
However, it is unlikely that a three-month contribution suspension will be enough for many companies, and we expect many companies to need to go back to trustee boards and require a longer deferral in cash contributions.
We are facing an unprecedented crisis that requires new solutions, not simply relying on the old rules and believing companies can make it through this situation.
A pragmatic solution can be agreed between companies and trustees and defined benefit pension schemes which will hopefully lead to companies surviving coronavirus, and members being paid their full pension benefits as and when required.
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