Where an employer leaves a multi-employer defined benefit scheme and there is a deficit in the scheme, the employer may have to make a contribution to the scheme under the employer debt legislation.
The UK government has brought into force amendments to the employer debt legislation from 6 April 2018. The amendments introduce the ability for an employer to defer the requirement to pay its employer debt (section 75 debt) to the scheme by way of a "Deferred Debt Arrangement" (DDA).
Employers are required to pay a section 75 debt when a scheme winds up or an "employment-cessation event" arises – in broad terms when an employer ceases to employ an active member of the scheme but another employer carries on employing a least one active member.
The DDA represents another method of dealing with an employer's section 75 debt alongside methods such as flexible apportionment arrangements, scheme apportionment arrangements and withdrawal arrangements.
The trustees have to give their consent to the DDA and the employer will remain an employer for scheme funding purposes. The scheme cannot be winding up or in a PPF assessment period and the trustees must be satisfied that one is unlikely to begin within the next 12 months. The Trustees also have to be satisfied that:
"the deferred employer's covenant with the scheme is not likely to weaken materially within the period of 12 months beginning with the date on which the trustees or managers expect the deferred debt arrangement to take effect" [our emphasis]
The DDA will terminate and the section 75 debt will therefore become immediately payable on any of the following events:
- The employer employs an active member
- An insolvency event occurs in relation to the employer
- The scheme commences winding up
- The employer and the trustee agree it should terminate
- The employer restructures
- A freezing event occurs to the scheme i.e. it ceases future accrual for all employers at the same time
- The trustees serve notice on the employer if they are reasonably satisfied that (i) the employer has failed to comply materially with its duties under scheme funding; or (ii) the employer's covenant is likely to weaken materially in the next 12 months; or (iii) the employer has failed to comply materially with its duties to disclose information to the trustees under the Scheme Administration Regulations
Clyde & Co Comment:
Although this brings further flexibility for employers, the ability of the trustees to serve notice to bring the DDA to an end is likely to be of concern for employers who will want the certainty that a debt will not be triggered. Employers will be relying on the trustees' judgement and their ongoing review of the covenant supporting the scheme to not have the debt triggered.
"Not likely to" weaken materially is not defined in the new legislation and trustees may come to rely to a large extent on the Pensions Regulator's guidance – "Assessing and Monitoring the Employer Covenant". This would give the Pensions Regulator further power and influence in shaping how trustees monitor employers' covenants and ultimately how defined benefit schemes are funded.
We suspect therefore that employers may prefer to continue to use flexible apportionment arrangements which provide more certainty about how the section 75 debt will be dealt with.