Out-Law / Your Daily Need-To-Know

Out-Law News 2 min. read

Employer debt deferral proposed for multi-employer pension schemes


Plans put forward by the government could give the sponsoring employers of multi-employer defined benefit (DB) pension schemes more flexibility over when to repay employer debt once they no longer employ an active member of the scheme.

The proposed 'deferred debt arrangement' would help to address the position where an employer in a multi-employer scheme risks triggering its section 75 debt funding obligation by running out of members who are still earning benefits under the scheme, according to pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com.

Historically, this has been a problem for many employers, especially those who participate in 'industry-wide' non-associated schemes, which are particularly common in the charity sector, Scholefield said.

"Whilst one can debate whether the details are quite right, the proposal is likely to be very welcomed by many employers and strikes a sensible balance between the interests of employers and scheme members," he said.

When an employer leaves a multi-employer DB scheme, there should be enough funds in the scheme to pay for the benefits of it employees once they reach retirement age. If there is not, then the departing employer will be responsible for its share of any underfunding. This is known as employer debt, or 'section 75' debt, after the relevant provision of the 1995 Pensions Act; and is calculated by reference to the cost of buying out the members' benefits with an insurance company. In many cases, this cost can be significant.

Draft regulations, published by the Department for Work and Pensions (DWP) in response to a March 2015 consultation, would allow an employer to defer its requirement to pay an employer debt on ceasing to employ an active member, with the agreement of the scheme trustees. The employer would retain its funding obligations to the scheme, and would still be treated as an employer in relation to the scheme.

The arrangement would be subject to certain conditions, including a funding test to ensure that the scheme would continue to be sufficiently funded. It would not be available to schemes under assessment by the Pension Protection Fund (PPF), or likely to be so in the next 12 months. Employers undergoing restructuring would not be eligible for a deferred debt arrangement.

The scheme's trustees would have to be satisfied that the arrangement would not be detrimental to the scheme or its members before giving their consent. They would also retain the power to require repayment of the debt if they consider that the employer has not met its obligations under the scheme funding regulations. The draft regulations also include other situations where the deferred debt arrangement could come to an end, such as on employer insolvency or restructuring or where the scheme is wound up.

The consultation runs until 18 May 2017, and applies to England, Wales and Scotland. The government is anticipating that Northern Ireland will make corresponding regulations.

Pensions expert Stephen Scholefield said that although affected employers would welcome the proposals, implementing deferred debt agreements would not be straightforward.

"First, it requires the agreement of the trustees, so there is no guarantee that it will always be available to employers," he said. "It also requires the trustees to be satisfied that the security of members' benefits is not worsened, which whilst easy to say isn't always easy to assess. And even if a deferred debt arrangement is put in place, it can be terminated by the trustees if they think that the employer's covenant is likely to weaken in the following 12 months."

"As it stands, the proposal envisages that employers are locked into the deferred debt arrangement, and cannot voluntarily trigger their debt in the future without the agreement of the trustees. That is likely to be debated in the consultation, but if this remains these employers may find that the risk of a debt being triggered is replaced by the risk that they can't trigger a debt when they want to do so. For most employers, however, that will be a price worth paying," he said.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.