Legislation imposes a debt on the employer in certain events. The debt is calculated by reference to the cost of securing the scheme’s benefits with an insurance company. Most ongoing schemes are underfunded on this buy-out basis.
A debt is triggered in a multi-employer scheme where an employer ceases to participate, but at least one employer remains in the scheme. Typically this arises where a company is sold outside the group. The imposition of a substantial liability can cause difficulties for certain corporate transactions, particularly if the debt exceeds the value of the business! To mitigate this issue, since September 2005, it has been possible to enter into an approved withdrawal arrangement under which the leaving employer pays less than its share of the full buyout debt and one or more guarantors agree to cover the rest. These arrangements can be entered into only if the Pensions Regulator is satisfied that the statutory debt is “more likely” to be met if the arrangement is put in place. In practice this is a hard test to satisfy unless the employer is in dire straits.
The DWP has issued revised Employer Debt Regulations for consultation. Consultation closed on 1 October and the regulations are expected to be made by the end of 2007.
Many of the changes are clarifications or relaxations which are welcome. We set out below some significant changes:
New options on withdrawal of an employer
There will be several options:
- default position: as under the current rules, the debt will be the withdrawing employer’s share of the full buyout deficit (calculated in proportion to its share of total liabilities).
- scheme apportionment arrangements: the withdrawing employer will agree with the trustees to make a payment at an agreed level (which could be nil). The trustees must be satisfied that the remaining employers within the scheme are able and willing to fund the scheme and to make payments required under the scheme’s schedule of contributions and recovery plan.
- regulated apportionment arrangements: similar to the scheme apportionment arrangements but require the approval of the Pensions Regulator and the PPF. These may be used when a scheme is likely to enter a PPF assessment period in the next 12 months and the Pensions Regulator believes that such an arrangement will result in better funding for the scheme than if an employer insolvency occurs immediately.
- cessation agreements: a simplified form of the current approved withdrawal arrangements. The withdrawing employer pays an amount which is at least its share of the deficit as measured on the scheme specific funding basis (but less than its share of the full buy-out debt) and another entity agrees to pay the balance when the scheme eventually winds-up or ceases to have any solvent employers. The trustees must be satisfied that this agreement will not impact on any of the other employers’ commitments to the scheme and that the guarantor is likely to have sufficient assets to make good its commitment. The Pensions Regulator’s consent is not needed (although employers may wish to seek clearance before entering into such arrangements).
- withdrawal arrangements: similar to a cessation agreement but the approval of the Pensions Regulator is required. The Pensions Regulator may approve a withdrawal arrangement where the initial payment is less than the employer’s share of the deficit on the scheme specific funding basis. These will be more flexible than under the current rules: the Regulator will only need to be satisfied that it is reasonable to approve such an arrangement.
Wedlake Bell comment: there are too many choices! Companies involved in corporate transactions may find it difficult to decide which approach is most suitable, and so may decide to involve the Regulator, which can increase both the timescale and cost of the transaction.
Cessation of accrual
The DWP has now announced that they do not intend the debt to be triggered where all employers cease at the same time to have active members and the scheme continues as an on-going scheme. The DWP and the Regulator are concerned about scheme abandonment but recognise that where employers are able and willing to continue to fund accrued benefits, they should be able to terminate future accrual across a Scheme without accelerating the obligation to fund the deficit. This reverses the DWP’s initial approach in their Consultation.
We now await the final Regulations to see what they actually say.