The financial disruption caused by Covid-19 has caused a painful set of asset and liability shocks to DB schemes. But the most pressing issue for schemes is the potentially significant impact of the crisis on the viability of sponsoring employers according to LCP partner, Steven Taylor.

Pension scheme funding is in a better place than at the time of the ‘credit crunch’ of 2008, with the most recent PPF ‘purple book’ showing funding at around 77% of buyout levels compared to around 60% in 2008. At that time, to mitigate the impact of the crisis, some employers responded by using flexibilities in the funding regime to extend or “back end load” recovery plans, in order to improve current cashflow. The current funding regime still contains flexibilities, and the Pensions Regulator has, as one of its statutory duties, to have regard to the ‘sustainable growth of the sponsoring employer’. But regulators and trustees will not want to see these flexibilities used as a ‘blank cheque’ for employers to put off contributions which they could still afford, or used as excuse for putting pensions inappropriately at risk.

Commenting, Steven Taylor said:

‘The current crisis has clearly caused pressures for schemes on both the asset and liability side, but the bigger short-term issue in some cases is making sure that the sponsoring employer survives the crisis. In most cases, company insolvency will be a very poor outcome for pension scheme members. In past crises, the system has shown flexibility, with sponsors able to adjust recovery plans to deal with short-term pressures. We now need companies and trustees to work together to come up with plans that help the company to survive whilst retaining a credible approach to pension scheme funding, and provide appropriate protection for scheme members. Urgent clarity from the Pensions Regulator would be welcome to help trustees and schemes understand their options and how the regulator is likely to respond’.