Since the implementation in March of lockdown measures by the UK government in response to Covid-19, TPR has published guidance which encourages trustees to be flexible and open to deferral requests from employers.
Initial guidance published on 27 March recognised that visibility around the impact of the pandemic on employers may be poor. Therefore trustees could grant an initial 3 month deferral based on the limited information available. However, TPR expects trustees to not unquestioningly extend their original 3 month suspensions, rather they should undertake due diligence on the employer’s financial position before agreeing a new deferral.
The over-arching concern is that schemes must be treated fairly with other stakeholders including shareholders and other creditors. Based on TPR’s guidance to date, trustees’ focus is likely to be on the following:
- What is the justification for the deferral?
- What other cost-saving has taken place?
- Have other creditors been approached?
- Are lenders being supportive?
- What other sources of funding have been considered?
- What are the prospects for the employer’s survival? ie will the employer be in a position to repay the contributions
The latest guidance dated 16 June reinforces earlier guidance in that agreeing to a deferral trustees should consider the following:
- All dividends and other forms of shareholder distribution should stop throughout the period of suspension and not start again until the deferred contributions have been paid
- Where contributions have been suspended or reduced, trustees should agree arrangements for contributions to start again
- Where a deferral is agreed as part of a refinancing, trustees should fully understand the terms aof that refinancing. If possible they should try to seek the same recourse and access to security/valuable assets, for example, with the deferred sums being given the same protections as the new money lending
- Enhanced monitoring of the employer’s trading and liquidity position is likely to be required over the short to medium term.
Argyll comment: we have seen a proliferation of contribution deferral requests in the last few months. The challenge for trustees is still to understand the likelihood of recovering those contributions. Covenant advice needs to consider the employer’s ability to see through the short term challenges and in particular whether it has sufficient liquidity (access to funds) to absorb losses.
