Trustees should plan for employer insolvency even when times are good says PPF

Recent high profile insolvencies that have hit the headlines are a stark reminder for trustees of the need to take the risk of employer insolvency seriously, whatever the size of the employer's business. The Pension Protection Fund (PPF) has recently published some practical guidance on making sure transfers into the PPF go smoothly.  The steps suggested by the guidance depend on the covenant strength of the employer, but there are some steps which the PPF says all trustees should be taking even where the employer covenant is strong.  

Steps where the employer covenant is strong

• Complete set of all governing documents to be held in more than one place.  
• Contingency plans for payroll and banking independent of employer.

If an employer of a defined benefit scheme becomes insolvent, the PPF will need a set of scheme governing documents as soon as possible.  If the only copies are at the employer's premises or on the employer's electronic network, it may be difficult to retrieve them.

The PPF recommends trustees review their arrangements to be confident that the scheme payroll could still be run if the employer fails.  This becomes critical when the employer operates an in-house administration team.  When an employer fails, it is unlikely the company payroll function will continue to operate for long.  If the trustee bank account is operated on the employer's online banking platform, access is likely to be frozen notwithstanding that it is a separate account.

Steps where the employer covenant is weak

In addition to the steps listed above:

• Review steps to realise any charges and assets contingent on the employer's failure.
• Contingency plans for documents and data held on the employer's premises.
• Review of employers for PPF entry purposes.

If the trustees have the benefit of a charge or asset contingent on the employer's failure, the PPF will need immediate access to the relevant documents on the employer's insolvency.

If pension scheme documents and member files are stored at the employer's office or on its electronic network, it is critical that these can be easily extracted and identified.  This task is easier if an up-to-date record of documents held is readily available and backups for electronic data are maintained.

For a multi-employer scheme, trustees will need to be able to show how each employer has joined and exited the scheme, including whether debts were triggered and paid under employer debt legislation when this happened.  Inability to do this can cause unnecessary delays to a scheme entering a PPF assessment and members receiving the assurance that they are protected.  Trustees should also hold information about which members are/were employed by each employer.

Steps where the employer is stressed or distressed

In addition to the steps listed above:

• Make sure the scheme bank account and payroll can be operated independently of the employer.
• Contingency planning with the PPF specialist team and PPF service provider.

The PPF suggests considering setting up a separate account and holding 3 months' worth of payroll if insolvency is imminent and payroll is run in-house.

The PPF gives an example of how the early involvement of its specialist team can ensure access to scheme information is maintained, citing a case where a specialist third party administrator took a complete copy of a scheme's administration system and payroll information.

Our thoughts

Trustees of a scheme where the employer has gone bust are potentially vulnerable to claims and complaints from members if the pension scheme does not continue to operate smoothly.  It can be tempting for trustees to ignore the risk of employer insolvency if there is no immediate reason to expect it, but fixing the roof when the sun is shining is likely to be far easier than attempting to collate information when insolvency is an imminent risk and key individuals may be focussed on issues other than the pension scheme.