In April 2017, the Government issued a consultation paper and draft regulations to introduce a new option for dealing with section 75 debts where an employer in a multi-employer scheme undergoes an "employment cessation event".
As a reminder, an employment cessation event will occur if an employer in a multi-employer scheme ceases to employ an active member at a time when another employer (other than a defined contribution employer) continues to employ at least one active member. A debt under section 75 of the Pensions Act 1995 becomes due from the employer which underwent the employment cessation event.
Under the new option, to be known as a "deferred debt arrangement" (DDA), payment of the section 75 debt would be deferred. Instead of the debt being due, the employer would continue to be treated as if it employed an active member – remaining liable to pay contributions under the scheme specific funding regime and retaining responsibility for its share of any orphan liabilities. The conditions for a DDA would be:
- The trustees have given their written consent.
- The funding test under the regulations for scheme apportionment arrangements, flexible apportionment arrangements and withdrawal arrangements must be met. This means that the trustees must be reasonably satisfied that the remaining employers will be reasonably likely to be able to fund the scheme.
- The scheme is not in a PPF assessment period or being wound up and the trustees are satisfied that the scheme is unlikely to enter a PPF assessment period in the 12 months after the DDA takes effect.
A DDA will end if the employer:
- employs an active member of the scheme;
- chooses to trigger a section 75 debt, subject to the trustees' consent; or
- undergoes an insolvency event or starts voluntary winding up.
In addition, the deferred debt will also terminate (and an employer debt will become due) if:
- the employer restructures;
- the scheme ceases to employ any active members; or
- the trustees give notice of termination to the employer, being reasonably satisfied that:
- the employer has failed to comply with its obligations under the scheme funding regulations; or
- the employer's covenant is likely to weaken in the next 12 months.
Comment & Actions
- The proposed new regulations are potentially helpful. We envisage they will be most useful for non-associated multi-employer schemes for whom the existing options available for managing section 75 debts (such as flexible apportionment arrangements) are often not appropriate (because they require liabilities of one employer to be transferred to another). For associated multi-employer schemes, we imagine clients will prefer to use the existing (tried and tested) mechanisms instead.
- Some of the conditions of the new regulations are potentially very difficult. One of the circumstances in which a debt under a DDA could be triggered by the trustees is if the deferred employer's covenant to the scheme is likely to weaken. There would inevitably be some doubt as to what "covenant" means in this context. Perhaps surprisingly, this is the first time the word "covenant" has ever been used in pensions legislation, and there is no definition for it. It would appear to require the trustees to monitor the covenant throughout the DDA – a fairly onerous (and costly) commitment.
- Overall, wide use of the DDA seems unlikely. In corporate transactions, a flexible apportionment arrangement, unlike a DDA, can allow a buyer to take a company free of any pension liability. Where an employer's last active member leaves service, a DDA could be an option, but the employer will lose control of when the debt is ultimately triggered. By contrast, a former employer in a frozen scheme normally has the option of crystallising a section 75 debt by giving notice to the trustees.