Summary. The Pensions Regulator (the Regulator) has issued a statement on regulated apportionment arrangements (RAA) and employer insolvency (the statement).

Background. A section 75 debt may be triggered against employers participating in a pension scheme where the employers suffer an insolvency event (section 75, Pensions Act 1995). Unless an alternative arrangement recognised by legislation is agreed, the amount of the section 75 debt is a prescribed share of the scheme’s buy-out deficit. The insolvency event of the employers may also trigger an assessment period (assessment period) for the purposes of the Pension Protection Fund (PPF).

An RAA may only apply where an assessment period commences or is reasonably likely to commence in the next 12 months. Under the RAA, the amount of the section 75 debt payable by an employer can be reduced or increased with a corresponding increase or reduction for other employers. An RAA requires the approval of the Regulator, and the Board of the PPF must not object to it.

Facts. The statement’s key points are that:

  • An RAA will be rare. The Regulator’s decision is highly unlikely to have an impact on the level of members’ benefits.
  • Where there is a serious risk of insolvency, employers, trustees and advisers should engage in discussions at an early stage. Trustees and advisers should consider alternatives to an RAA and whether insolvency is inevitable. The independent financial advice the trustees receive will be fundamental.
  • Engagement with the Regulator should also happen at an early stage. An application to the Regulator for an RAA must be accompanied by a clearance application.
  • The Regulator may take some time to carry out its due diligence to assess whether an RAA is appropriate and will work closely with the PPF. The Regulator will consider: whether insolvency of the employer would otherwise be inevitable without the RAA; whether the scheme might receive more from an insolvency than it would from the PPF; whether a better result might be obtained through the use of the Regulator’s powers; the position of the rest of the employer’s group; and the outcome of the proposals for other creditors.
  • The Regulator will first decide whether an RAA might be appropriate and reasonable, and then whether the proposed level of mitigation is appropriate. An approval notice cannot be issued until 28 days after the Regulator determines to approve an RAA.

Comment. This is useful guidance as to where an RAA may become relevant.

Source: The Regulator: regulated apportionment arrangements and employer insolvency, 12 August 2010, arrangements-statement-august-2010.pdf.