Weather-proofing: pension lawyers and the stock market collapse
20 November 2008
As the current financial storm continues to rage, employers and trustees are having to face up to the impact of the recent stock market collapse on their pension schemes.
The deficits in many defined benefit occupational pension schemes will be significantly higher than expected, and this comes at the worst time for employers as they try to navigate their way through the choppy waters of an economic downturn.
Amid such volatile market conditions, the role of pensions lawyers is more important than ever if schemes are to be effectively safeguarded. So how can pensions lawyers help their clients ride out the storm?
Scheme funding – keeping the ship on course
Over the years pensions lawyers have played a central role in helping sponsoring employers and trustees put in place suitable funding arrangements for their schemes. More recently there has been a major focus – driven by the Pensions Regulator – on improving the funding position of defined benefit occupational pension schemes and on increasing the security of members’ benefits.
The importance of the pensions lawyer’s role in this regard is likely to increase as the economic downturn bites. Employers who are strapped for cash will be looking for alternative ways of supporting their schemes through this difficult period, for example by putting in place some form of contingent security, such as a parent company guarantee or a charge over property.
Trustees, on the other hand, will want to ensure that members’ benefits are secure and they will need to monitor closely the financial strength of their schemes’ sponsoring employers to ensure that they continue to be able to stand behind the schemes. Trustees are also likely to need advice on their options for putting in place additional security.
Liability management – bailing out the water
In recent years employers have increasingly been looking for new ways to manage their pension scheme liabilities. Faced with increasing pension liabilities on their balance sheets, this trend is likely to continue, and pensions lawyers will be required to advise employers and trustees on the suitability of various options for reducing the risk and volatility associated with these liabilities.
Corporate insolvency – time for the lifeboats
In extreme cases pensions lawyers will need to advise trustees on the appropriateness and timing of any decision to wind up their schemes and call in any amounts that are due from sponsoring employers. Where sponsoring employers become insolvent, pensions lawyers will need to work closely with their insolvency counterparts to maximise recovery for the scheme. They will also need to consider the availability of compensation for members where the scheme is underfunded from the Pension Protection Fund.
What’s on the horizon?
Despite the fact that employers and trustees are likely to face some significant short-term challenges, it is vital that their legal advisers remind them to keep one eye on the horizon. A new Pensions Bill is currently going through Parliament that will lay the foundations for the Government’s new national pensions saving scheme (known as ‘Personal Accounts’), which will be introduced in 2012.
From 2012 all employers will be required to pay a minimum contribution towards their employees’ pensions, and they will have to automatically enrol their staff into the Personal Accounts scheme or into a work-based pension arrangement that satisfies certain minimum criteria. The new Pensions Bill will also extend the powers of the Pensions Regulator. Therefore it is vital that pensions lawyers help their clients to prepare for the challenges ahead, as well as helping them overcome the short-term challenges they may be facing.
All hands on deck
In order to help clients navigate a successful course through the economic storm, pensions lawyers will need to work closely with lawyers from other disciplines. Whether this is working with their banking team to put in place additional security for a scheme, or with financial services when coordinating the buyout of a scheme’s liabilities, pensions lawyers will need to draw on additional expertise to help their clients stay afloat.
Riding out the storm
Although there may be choppy seas ahead for sponsoring employers and pension scheme trustees, with the right legal advice and a following wind they should be able to ride out the storm safely.
Anthony Arter is head of pensions at Eversheds