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The ongoing COVID-19 situation has raised global economic concerns around market volatility and financial losses. It is currently difficult for companies to manage such an abrupt shock to their cashflows, particularly given expected tightening of access to borrowing and increased costs of borrowing. The negative impact on equities and portfolio valuations leads to challenges for pension trustees, beneficiaries, and sponsors of pension schemes.

In this article, Liam Lynch, Partner and Head of Private Clients at KPMG Ireland and Joanne Roche, Director in KPMG’s actuarial team set out practical risk management considerations for pension trustees. They consider some immediate actions for trustees as they navigate the current situation and manage their relationships with scheme sponsors and members.

It is vital to have strong governance standards in place to allow trustees to manage their responsibilities effectively in a time of crisis, Liam and Joanne advise. During this time trustees need to decide on the steps which need to be taken to ensure minimal disruption to the administration of pension schemes and good governance will stand to them when confronting these challenges.

1. Take stock

Take stock of the situation in a calm manner and avoid rushing into short-term investment decisions. 

Liam and Joanne caution that we are still uncertain about how the crisis will evolve and rushed decisions may have negative implications in the long-term. In these uncertain times, effective communication is vital both to gather insights necessary to take decisions in future, including investment decisions and also to keep key stakeholders such as scheme sponsors and members up to date as the situation evolves. 

2. Pensions obligations & operations

From an operational point of view, ensure that pensions obligations are still being met.

The impact of the COVID-19 virus can mean that personnel involved in the day to day administration of the scheme are working from home or are not available to work. The first step to take is ensuring that procedures are in place to continue the operation of the scheme.

You will need to ensure that contingency plans are in place for third party scheme administration and in-house company pension resources. In the context of revised working arrangements, you should consider data protection matters and check that, if using different platforms to share information, data continues to remain secure.

This might also be the time to assess if issuance of online benefit statements via a secure portal, for example, represents a reasonable, practical alternative to paper-based statements.

The Pensions Authority has helpfully highlighted those areas of pension scheme administration which administrators should prioritise at the current time of heightened activity and queries for administrators. These include:

  • that pension payments to retired members are paid as they fall due,
  • that other benefits are paid in a timely manner,
  • that contributions paid by members and employers are remitted promptly to the scheme (where these have been deducted).

From a practical perspective, it may be that other longer-term projects associated with the scheme may need to be suspended or deferred in order to allow time to focus on the key business as usual activities.

3. Scheme finances

Get in touch with the sponsor to determine their current position with respect to the scheme finances.

A key concern of many sets of trustees is the sponsor’s continued ability to fund the pension scheme and at the same level as heretofore in the current cash constrained environment.

To plan for an effective conversation about the employer covenant i.e. the sponsor’s current ability and willingness to continue funding the scheme including any deficit contributions where applicable, trustees should consider a number of factors. These include:

  • the nature of the employer’s business,
  • the backdrop of news in the industry / sector, and
  • a determination of what information will be needed from the sponsor in order for the trustees to make an assessment.

At this time, employers may be placing employees on reduced pay, reduced working hours or laying them off. Amending payrolls to implement the changes can be time-consuming and extends to ensuring that pension contributions are amended correctly and that death in service cover is not unwittingly removed where this is not intended.

Where there are requests from employers to suspend ongoing contributions on a temporary basis or to seek other alleviations such as paying deficit repair contributions over an extended timeframe, Joanne recommends that trustees firstly consult the trust deed to ascertain whether provision has been made for such a scenario and what, if any consents, may be required

Liam and Joanne advise that the important action as a first step is for trustees to receive an update on their funding valuations from the scheme sponsor. In the short term, an agreed approach for trustee discretions in relation to any member options will be needed. 

4. Communications

Plan for communications with scheme members.

In these uncertain times, effective communications with scheme members remain vital and there are a number of areas in which member communications will need to be developed.

Any planned alterations to pension contributions will need to be clearly communicated to members.

In the context of Defined Contribution schemes, trustees may want to consider targeted and considered communications to guard against members switching out at the bottom of the market. Trustees will need to effectively communicate with members and be clear about timelines associated with investment switches and ‘out of market’ risk. Communications which reinforce the long-term nature of pension provision against the background of what many anticipate will be a shorter-term economic crisis may help to calm anxious members. 

5. Investment risks & opportunities

Take advice from an investment advisor to ensure that the current risks can be addressed and remain vigilant for potential opportunities. 

Items for discussions with investment advisors include:

  • holding of meaningful cash balances to reduce the number of transactions necessary and associated investment transaction costs,
  • reviewing any planned asset transitions with a recommendation to only proceed where these would serve to materially reduce risk or increase expected return,
  • having appropriate cash authorisation procedures in place (including allowing for any planned or unforeseen staff absences) to reduce operational risks around cash balances.

In addition to careful scheme risk management there may also be opportunities arising which can be identified by investment managers or the scheme’s investment consultant. There may be opportunities for defined benefit schemes, for example, to hedge more inflation linked benefits given the material drop in inflation expectations in recent times.

Get in touch

If you have any questions about the above, please get in touch with our Pensions team or with Liam or Joanne via the contact details on this page.

Further information