Why are legislative changes needed?
Legislation is currently in place protecting final salary scheme members where their employer ceases to participate in the scheme. Where this occurs, if the scheme liabilities exceed the scheme’s assets, the employer must usually pay the section 75 debt that is due (the cost of providing the benefits with an insurance company). Where a number of employers actively participate in the scheme a debt can arise where one employer ceases to have any active members in the scheme at a time when other employers continue to employ active members – an employment-cessation event.
Where the scheme employers all operate within the same corporate group (and therefore participate in an associated multi-employer scheme) it is usually possible to manage the impact of an employment-cessation event through arrangements currently available under the employer debt legislation. The position is not straightforward where the scheme employers are from unconnected businesses or companies (and therefore participate in a non-associated multi-employer scheme – these are often industry-wide schemes).
Following concerns from the pensions industry about how the current employer debt legislation operates in respect of non-associated multi-employer schemes, a Call for Evidence was undertaken by the Department for Work and Pensions (DWP) in March 2015. The majority who responded stated they considered the employer debt legislation should be amended to assist employers in non-associated multi-employer schemes manage the employer debt that becomes due following an employment-cessation event. Responses were fairly evenly split as to whether the changes should only apply to non-associated multi-employer schemes or whether they should also apply to multi-employer schemes where the employers are associated.
What is being proposed?
Having reviewed the responses to the Call for Evidence, the DWP has issued a consultation setting out proposed changes to the current employer debt legislation. The consultation opened on 21 April and will close on 18 May.
The main change proposed is the introduction of a new option – the deferred debt arrangement (DDA) – that will sit alongside current options to deal with employer debt such as apportionment arrangements and periods of grace. The DDA will be available to both associated and non-associated multi-employer schemes and will enable an employer to defer the payment of the section 75 debt triggered on the employment-cessation event and remain an employer for the purposes of the scheme, albeit as a “deferred employer”. Various conditions would need to be satisfied in order to enable the DDA to take effect including:
- the scheme trustees have given their consent;
- the scheme is not in an assessment period or being wound up; and
- the funding test is met (the funding test is already applied in respect of some of the other arrangements used to manage employer debt under the current legislation).
The Pensions Regulator would need to be notified of a new DDA.
The current proposal envisages that the DDA would end in a number of circumstances, including:
- where the deferred employer employs an active member;
- the employer triggers the section 75 debt subject to the consent of the trustees; and
- the deferred employer restructures.
The trustees will also have the ability to bring the DDA to an end in certain circumstances, for example where they are reasonably satisfied the covenant of the deferred employer is likely to weaken in the next 12 months.
The consultation also proposes some technical changes to the current employer debt legislation including clarifying the position where there have been consecutive employment-cessation events in relation to an employer and extending the period of grace notification period.
Will the proposals assist employers in non-associated multi-employer schemes?
Whilst employers in non-associated multi-employer schemes will no doubt be pleased to see draft regulations attempting to address the employer debt issues they have been raising for some time, there is likely to be concern as to the wide powers of the scheme trustees to bring a DDA to an end. Although, the consultation envisages that it would be rare for the scheme trustees to take such a step, it may deter employers from using a DDA if control over its life-span rests in someone else’s hands. This could mean employers in non-associated multi-employer schemes continue to have few options available to them to manage any section 75 debt that is due.
 Section 75 Employer Debt in Non-Associated Multi-Employer Defined Benefit Pension Schemes – Call for Evidence – March 2015.
 The draft Occupational Pension Schemes (Employer Debt) (Amendment) Regulations 2017 – Public consultation – April 2017.
This blog post was written by Kate Lloyd. For further information, please contact:
Michael Collins, partner, Pensions
T: 0121 234 0236