Recent controversies surrounding the state of BHS and Tata Steel’s pension schemes have raised discussion about what trustees should do to mitigate further damage in the event of a distress scenario. A panel at Workplace Pensions Live 2016 examined their options.

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The high-profile collapse of retailer BHS, whose pension scheme had a £571mn deficit and may result in some 20,000 members having their benefits cut, has shed light on the disastrous possibility of an outcome whereby schemes cannot afford to pay out benefits to all of their members.

According to Thursday’s first keynote panel speakers, when a corporate sponsor is in crisis, it is vital for all stakeholders involved to face up to the reality of the situation and communicate well with each other to prevent a scheme falling into even greater decline.

“People have got to not have their heads in the sand, I’m afraid,” said Malcolm Weir, head of restructuring and insolvency at the Pension Protection Fund (PPF). Asked about the dire situation facing BHS’s scheme, Weir said it was “no surprise to me at all it came our way”, confirming that the PPF had been in discussions with the sponsor for some time but that those “didn’t amount to decisions for various reasons”.

It is important for schemes and their sponsors to identify a problem once it starts to build up, and get all parties concerned to engage sensibly, as there are more options “at the top of the decline curve”, he added.

“Too often, apathy allows decline to happen”

Chris Martin, managing director at Independent Trustee Services, agreed, stating: “too often, apathy allows decline to happen.”

Martin, who was constrained on his ability to discuss events at BHS due to an ongoing select committee inquiry and a regulatory investigation into its problems, said that “BHS is exactly what we were are talking about on panel today” by highlighting the need for trustees to manage members’ expectations, to understand what sponsors can afford, and find a deliverable compromise.

Martin urged stakeholders facing a distress scenario to avoid a situation whereby trustees, advisers, the company board and shareholders alike end up in denial and allow the problem to get worse, rather than tackling it. He referred to this as having “collective heads in the sand”.

By escaping denial, trustees can start to get a handle on the length of the recovery plan, the strength of the employer covenant and get a sense of where the deficit is at, Martin said. He warned against running an investment strategy that attempts to bring a scheme out of deficit by relying on a belief that “it’s okay, markets will sort us out and things are great”.

This potential for denial herding echoed warnings by behavioural economist Paul Craven, who delivered in a keynote speech right before the panel, that in decision making, people tend to adopt a consensus rather than considering an alternative view.

Ashok Gupta, chair of the DB Taskforce at the Pensions and Lifetime Savings Association (PLSA), suggested that the way the role of trustees has been crafted relative to that of employers might be unhelpful for dealing with distress scenarios.

Citing the example of Tata Steel, he described an “invidious choice” that trustees are forced to make, with employees being made redundant in order to secure pension promises for baby boomers.

He said this is the type of situation that can result in conflict between employers and trustees, and that there is a need to think about other ways they can work together effectively.

Yesterday, it emerged that the UK government intends to ringfence Tata Steel’s pension fund and reduce its long-term liabilities by £2.5bn in order to make the firm a more appealing prospect for buyers. The fund has an estimated deficit of £485mn.