On 28 June 2011, the Department for Work and Pensions issued a consultation on draft regulations that introduce a new arrangement, a "flexible apportionment arrangement" for apportioning the liabilities of an employer withdrawing from a multi-employer defined benefit scheme.
The new flexible apportionment arrangements will build on existing easements in relation to the "employer debt" (the amount an employer must pay into the scheme, calculated on the basis that members benefits are secured by purchasing annuities with an insurance company). These easements are useful in the context of corporate restructurings in that they allow withdrawing employers to reduce the amount of the employer debt, for example by entering into a scheme apportionment arrangement, or avoid triggering the employer debt altogether if certain conditions are met.
Flexible apportionment arrangements ("FAAs") (which the government intends to introduce from 1 October 2011) are based on the existing scheme apportionment arrangement ("SAA") easement. According to the consultation document, FAAs would give more flexibility than an SAA, especially in corporate restructurings that involve a number of employers withdrawing from the scheme at different times. The key features of a FAA are:
- All of the pensions liabilities of the “leaving” employer(s) would be apportioned to one or more employers 'staying' in the scheme who would then 'step into the shoes' of the leaving employer(s).
- Trustees would still have to conduct the existing two-limbed funding test that has to be met for SAAs for a leaving employer. The test is (i) whether the remaining employers are reasonably likely to be able to fund the scheme and (ii) whether the FAA would adversely affect the security of members' interests.
- Once the funding test has been carried out in relation to a leaving employer, the consultation suggests that trustees have a discretion not to carry out the funding test again when another employer subsequently leaves the scheme.
- The trustees and the employers must consent in writing to the arrangements.
The DWP had, as part of the review, considered another proposal, the "Group Guarantee proposal" which would have allowed group employer(s) to avoid triggering an employer debt by guaranteeing the leaving employer's pension liabilities. This proposal has now been dropped.
The consultation also proposes to extend the 12 month grace period within which a leaving employer can employ an active member of the scheme and avoid triggering an employer debt . The consultation proposes that the 12 month period may be extended up to 36 months at the trustees' discretion.
We consider below some of the issues and points raised in the consultation document:
- In a restructuring that involves a number of employers withdrawing from the pension scheme at different times, employers and trustees may find it beneficial to put a FAA in place to deal with the entire restructuring and by doing so, avoid delays in the restructuring process. It is currently possible to use SAAs in similar circumstances. The precise advantages of a FAA therefore have still to be worked through and there will no doubt be drafting comments made to the DWP to clarify certain areas.
- Under the SAA regime, strong companies that do not participate in the scheme cannot accept the liabilities of the leaving employer. Unfortunately, as the regulations are currently drafted, the FAA regime would not allow non-participating employers to accept the liabilities of the leaving employers either.
- In the consultation document, the DWP seems to suggest that the employer debt under SAAs may be apportioned only on a fixed basis. This would seem to be contrary to the DWP's clarification in its December 2008 technical consultation that the policy intention behind SAAs was that the leaving employer's share of the debt could be apportioned on either a fixed or a floating basis (but not both). Although the legislation in relation to SAAs is not entirely clear on this point, the general, predominant view is that a section 75 debt may be apportioned under an SAA on a floating basis. Given the uncertainty around SAAs raised by the consultation and the draft regulations and the role for SAAs after FAAs can be implemented, implications for SAAs currently being negotiated and also those that have been entered applicable to employers leaving the scheme after 1 October 2011 need to be considered carefully.
The consultation period runs until 10 August 2011. We are currently involved in making representations to the DWP in relation to the proposals and will be tracking developments in forthcoming pensions e-bulletins.