Digital Deli – food for thought

Transaction costs are higher in most assets – especially credit assets – at the moment and so this will need to be considered.

Of course this was highly topical, particularly during our early events when many of the finer details were unclear.  Whilst with each successive session, additional government guidance resolved some of the challenges we had discussed in the earlier groups, a number still remain. In particular, in relation to defined contribution (DC) and defined benefit (DB), the salary on which to determine both member and employer contributions – noting that for DC this decision will directly influence the resultant benefits, potentially even where a potential approach is to top up any missed contributions at a later date due to (hopefully) recovering asset values.  

Some of our audience were keen to ensure their employees were provided with benefits at the pre-furloughing level even where this meant additional cost to the employer. Whilst for others, the harsh business reality meant they were looking to see how to reduce all payments from the employer - this was particularly tricky where salary sacrifice was in place and, quite rightly, most had sought legal advice on how best to proceed. All agreed one of the big unknowns regarding how to address pension contributions was the period for which this action was required – or in other words: how long lockdown might remain.

Alongside these considerations other, often associated benefits such as life insurance and private medical, were discussed.  Without exception, all were looking to ensure that their employees continue to have access to a similar level of benefit during furlough as they had enjoyed previously.

With many renewals due at the end of March or start of April, we emphasised the importance of providing HR teams with guidance on the salary to use for renewal. It was also noted that some of the private medical insurers, who are currently scaling back their own treatments to support the NHS, will consider how premiums may be adjusted retrospectively to take account of limited resources and access to treatments being currently available.

Transaction costs are higher in most assets – especially credit assets – at the moment and so this will need to be considered.

For those with DB obligations cash flow was understandably a hot topic. Many had considered the pensions regulator’s guidance around deferring deficit contributions and were interested to hear that one in ten of our clients had agreed to defer their deficit contributions in some way. Each firm’s circumstances will clearly differ and it is worthy of note that this 10% is weighted towards those in the retail and manufacturing sectors.  In practical terms, the deferral has typically been implemented in one of three ways: breaching the schedule of contributions, deferring three months contributions until the end of the current recovery plan or re-spreading contributions due in the near term to later in the recovery period. 

A couple of the discussions also noted the dynamic between the cash flow needs of mature pension schemes vs the cash flow needs of the business and how this was influencing deferral decisions. For some it was not necessarily the case that holding back deficit contributions was automatically the best solution given the high level of cash outflow from the pension scheme which would otherwise need to be met by disinvestment.  There were even a couple of cash rich organisations who had considered additional contributions to the pension scheme.

Attendees with ongoing actuarial valuations, particularly those nearing completion, noted that, whilst The Regulator’s guidance was helpful in terms of stating post evaluation experience it needs to be considered by trustees, as they were struggling to see how sound covenant advice covering the period beyond the current uncertainty, could be formed.  

As a result, they were concerned that in the absence of undisputable strong and reliable positive indicators, this may result in more prudent assumptions being adopted by the trustees with an undesirable impact on the resulting recovery plan.  Whilst we have seen clear evidence of robust business resilience plans being shared with trustees (and under constant review!) it will be interesting to see how covenant advisers respond to these challenges as they provide advice on sponsor covenant through these challenging times.

Last but by no means least, member communications was a real hot topic. As has been the case with much (non-pensions) reporting during this period the concerns were balancing the risk of saying too much and causing concern with that of providing enough information to reassure members. The general consensus to striking the right balance to provide personalised and segmented communications which address the likely specific concerns of each particular cohort.  

Regardless of the continued availability of in-house pension teams or third party administrators, there has been a noticeable reduction in member enquiries – on the one-hand it is likely that other priorities have moved to the fore, however it may be a reflection of an unawareness of the support available.  One more specific concern we discussed was the likely reaction to annual DC statements with an effective date on or around 31 March 2020. All agreed this would require some additional wording and ideally the ability to include an update of fund performance afterwards.