The spread of the Covid-19 virus has caused significant challenges for pension scheme trustees and sponsors. This is a fast-moving situation, but at the time of writing in April 2020, equity markets have fallen by 20%-25% since the start of the year. Yields on long-dated gilts have also fallen by around 0.5% pa, increasing the assessed value of pension liabilities.

There are a number of issues for defined benefit pension schemes in the charity sector to consider at this time.

Impact on the charity

The first question is to understand how the charity is affected. For example, what is the expected impact on income from donations, and how are the charity’s reserves likely to be affected? If the financial strength is expected to deteriorate, this could have implications for the pension scheme’s investment and funding strategies.

In some cases, agreed deficit contributions may no longer be affordable. Where charities request a temporary suspension of contributions, trustees of pension funds need to assess the situation to understand whether the request is appropriate, taking into account guidance from The Pensions Regulator.

Investment issues

The implications for the scheme’s investment strategy should be discussed with the scheme’s investment adviser. This could include:
• the timing for any agreed investment strategy changes;
• whether to suspend automatic rebalancing of assets in line with benchmarks; and
• the potential need to disinvest funds on an ad-hoc basis.

Having sufficient liquidity to meet benefit payments is a particular concern, especially if arranging disinvestments is more challenging. Pension schemes may wish to increase the cash “float” for additional comfort.

Funding issues

Pension schemes should understand the impact on their funding position, and implement any agreed contingency plans.

Where funding valuations are in progress, the impact of post valuation experience should be considered, although if discussions are at an advanced stage it will often be appropriate to sign-off agreed plans based on the position at the valuation date.

For schemes open to accrual, if the charity is “furloughing” employees, the implications for pension contributions, benefit accrual and life cover should be considered. The impact will depend on the wording in the scheme rules, so legal advice may be required.

Transfer values

Consider whether it is appropriate to issue transfer values calculated using current market conditions, and if not, consider temporarily putting quotations on hold. If the pension scheme is underfunded, it may also be necessary to reduce transfer values to reflect the degree of underfunding.

Unfortunately, the risk of fraud is increased at this time, so it is important to make sure members are provided with sufficient information about potential pension scams when issuing transfer value quotes.

Operational issues

Trustees and sponsors of pension schemes should check their third party administrator’s business continuity plans are robust. The key question is whether there are systems in place to continue paying pensions and other benefits on time, particularly if members of staff are absent.

It may also be necessary to consider how meetings are conducted – for example, whether conference call meetings should make use of video facilities.

Need to know more?

Visit the Barnett Waddingham Covid-19 hub here.

This piece was written by Steve Hitchiner, partner at Barnett Waddingham, the sponsors of this article.

Share Story: