The Department for Work and Pensions has published a consultation on proposed changes to the employer debt regime.
Employer debt regime
If an employer winds up its defined benefit (DB) pension scheme or becomes insolvent, it will be liable to pay the funding deficit that exists in that scheme. Equally, if an employer stops participating in a multi-employer DB scheme while other employers are still actively participating, it will be responsible for paying its share of the deficit in the scheme. In either case, this will constitute a debt payable to the trustees of the scheme from the employer and this is often referred to as ‘statutory debt’ or ‘section 75 debt’. In the context of a multi-employer scheme, a section 75 debt will generally arise if an employer ceases to have any active members in the scheme and at least one other employer continues to have at least one active member.
Following a ‘call for evidence’ in 2015, the DWP has now proposed a new option for dealing with employer debt in multi-employer schemes. The new ‘deferred debt arrangement’ would allow an employer who ceases to employ any active members to continue as a scheme employer and retain ongoing liability for their deferred/pensioner members without triggering a section 75 debt. This new arrangement is intended for use in circumstances where the only change is that an employer ceases to have an active member in the scheme (either through retirement or leaving service). It will not be appropriate for employers who are re-structuring their business or carrying out other corporate activity - existing options, such as a Flexible Apportionment Arrangement (FAA), will remain the more suitable approach in those circumstances.
The DWP has proposed that the deferred debt arrangement would require agreement from the trustees and the trustees would themselves need to be satisfied that the arrangement will not risk the scheme’s ability to secure members’ benefits up to technical provisions. A deferred debt arrangement would also be a notifiable event and would need to be reported to the Regulator.
Alongside the consultation the DWP has published draft regulations. The regulations set out the circumstances in which a deferred debt arrangement will come to an end. Those circumstances include the employer taking on new active members, the employer becoming insolvent and the employer re-structuring. The arrangement could also be ended by the employer with the agreement of the trustees. In most cases, a section 75 debt will be triggered when the deferred debt arrangement ends.
The potential introduction of greater flexibility around employer debt will be a welcome development for many in the industry. The deferred debt arrangement may prove particularly helpful for smaller employers in non-associated multi-employer schemes, who are currently unable to make use of FAAs and other arrangements. Given the proposed statutory limitations, however, the new arrangement may have limited use in the context of corporate activity and re-structuring.
The consultation is open until 18 May 2017 and further information is available here.