Coronavirus: Final Salary Schemes

Given the significant announcements from the government in relation to the COVID-19 crisis, companies are having to devote considerable time and effort to ensuring the stability and future of their business. This is coupled with increasing uncertainty over the impact and duration of the crisis.

Stress testing

Companies need to stress test scenarios and take action to preserve financial liquidity. In this context, employers can look to defer deficit recovery contribution payments. This could be a significant sum for some businesses which may be welcome in the current turmoil. The Pensions Regulator believes the starting point will be to assess the impact of the Coronavirus on:

  • The employer's products and business, including the business continuity plan covering resource availability, staff and materials
  • Cash flow - the Regulator suggests 13 week cash flows where there is a significant impact on cash flow. Some employers are already preparing far longer projections given that this is estimated to go on well into the future
  • Key payment dates in the next three months which will affect the business i.e. rent quarter dates
  • The position of other lenders
  • Restrictions on using available borrowing
  • Banking covenant tests - when will these take place and are they expected to be met?
  • Consideration of how long existing facilities will be sufficient and/or is the employer discussing further funding facilities
  • Is new security sought by funders?
  • What is the position of key suppliers, creditors and trade credit insurers? Have any restrictions been applied?
  • What payments are proposed for shareholders in the next 6 months?
  • What support is expected to be available to the employer under the package of measures announced by the Chancellor on 17th March 2020?

It is only when these elements have all been considered that Trustees will be in a position to look at the employer's ability to meet its commitments to the scheme. Trustees have been asked to give consideration as to whether contingent assets may be available to support the scheme (this will particularly be the case if they are sought by other creditors). The Regulators view here is that creditors, shareholders and the scheme should all be treated fairly.

Tactical issues

The Regulator recognises that deferral of payments may be appropriate in the current circumstances and that this should be an appropriate part of any support package, in a coordinated way, across all key stakeholders for a business. In practice for many companies time is of the essence, and it may be better to serve a notice on the Trustees confirming (subject to having checked the trust deed & rules and employment contracts), that contributions will be suspended from a given date. This can be backed up with whatever information is to hand, based on modelling already undertaken and/or public announcement to suspend dividends. If further information is required, this can be supplied to the trustees in due course, and this approach will allow every pound to be carefully husbanded immediately.

Key indicators for Trustees

Key areas for Trustees should look for, according to the Regulator, are:

  • The employers cash flow and drivers for the request
  • Ensuring payments will not be made to related entities or shareholders
  • Banks should be supportive of the business rather than withdrawing borrowing facilities
  • Wherever the parties are strengthening their access to the employees assets through security, the scheme should be given its fair share of any new security
  • There should be agreements in place to prevent new dividends or intra group loans
  • Given the difficulty forecasting, payment suspension should have an end date, but also triggers to restart if trading returns to normal.

Points for employers to consider In addition to the sheer volume of information the Regulator is suggesting Trustees should be provided with, a couple of small points worth noting are:

  • Any agreement to prevent new dividends - the dividend restriction period should not exceed the time that the business ceases to operate, and in particular, you would need to take consideration of any restart time to get the business up and running.
  • Also in relation to starting making DRCs if trading returns, many business will not be able to “cold start”, there will be a lead time before services and goods are delivered and/or payments start to come in and bills can be paid, sufficient allowance for this needs to be built into any agreement made with the trustees whilst they should not be treated any differently than other creditors, they should not be treated preferentially to any other creditors.

If you would like to talk through the consequences for your business, please email us and one of our team will get in touch.


The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.