Protecting pensions after coronavirus

Across the whole economy, employers are under unprecedented strain as they deal with lockdown and economic contraction.

Companies with defined benefit pension schemes could face particular short-term pressures, as turmoil in financial markets may increase deficits – the gap between the assets a scheme has and the pensions it must pay – at exactly the time they are least able pay more money in.

So unions welcomed guidance from the Pensions Regulator last month that allowed companies to temporarily suspend payments to close deficits and gave more flexibility to those pension schemes with triennial valuations due this year.

These valuations are a snapshot of a scheme’s funding position that are used to agree a funding plan for the years ahead. For many schemes the picture in March 2020 could be misleading, giving the strangeness of our current situation.

The most important thing right now is to weather the storm and give employers and pension scheme trustees adequate time to make decisions that will have long-term consequences.

So unions are taking a pragmatic approach when issues like suspensions of deficit recovery contributions arise.

The latest guidance from the regulator, published yesterday, makes it clear that pension fund trustees should continue to be supportive of employers who are struggling as a result of the coronavirus pandemic.

But it also urges them to be vigilant about ‘covenant leakage’ – where money or assets that could be used to support an underfunded scheme instead leave the business through dividends or excessive boardroom pay, or are moved between group companies.

In other words, when we start to emerge from the current recession, shareholders and executives cannot push in front of pensioners and workers.

At the moment pension scheme members and shareholders are all in this together to a degree as dividends are cut or cancelled and companies are given leeway over their pensions obligations.

But in most years dividend payouts far exceed pension scheme funding – in 2018 blue chip companies paid seven times more in dividends than they did to plug gaps in their pension schemes, according to actuarial firm LCP.

If in the future normal service is resumed for dividend payments – or for boardroom pay – then companies will not be able to argue that honouring their pensions promises is unaffordable.