Summary and implications
From 1 November 2011 trustees are required to list each of their scheme’s “statutory employers” on the information provided to the Pensions Regulator in the scheme return – previously only current participating employers had to be identified. Essentially, statutory employers are those entities that satisfy the statutory definition of employer for the purposes of employer debt, scheme funding and Pension Protection Fund eligibility and may well include employers that have ceased to participate in the scheme. The definitions are slightly different for each of the three categories and trustees may need to undertake significant investigations to satisfy the Regulator’s new requirement.
- Trustees need to take urgent steps to establish who the statutory employers for their scheme are. This may involve reviewing scheme documentation and requesting historic payroll and other information former participating employers.
- If no statutory employer can be identified then the trustees need to inform the Regulator and give serious and urgent consideration to the level of support the scheme has and whether and how this should be strengthened.
- Failure to take reasonable steps to provide complete and accurate information to the Regulator could lead to civil penalties.
- Going forward trustees should be vigilant in retaining records and recording the status of all statutory employers.
New requirement to identify statutory employers
In July, the Regulator issued a statement confirming that trustees (other than those of money purchase schemes) will have to include details of all statutory employers on their Scheme Return. Scheme Return requests will be sent out during November and December and trustees have 30 working days from receipt in which to provide the required information.
The Regulator describes statutory employers as the employers legally responsible for:
- Meeting the scheme funding objective of the scheme;
- Paying the section 75 debt on employer departure from a multi-employer scheme, on scheme wind-up or on employer insolvency; and
- Triggering entry to a Pension Protection Fund (PPF) assessment period on insolvency.
This is not as easy as it sounds. There is legal uncertainty about exactly who is a statutory employer.
Once identified, the Regulator then expects the trustees to assess the nature and extent of each employer’s obligations to the scheme (for example an employer could still have an obligation in relation to a section 75 debt but not in relation to scheme funding). The next step (not required for the scheme return but an important aspect of a trustee’s general duties to the scheme members) is to assess the strength of that employer and its likely ability to meet its obligations. These issues are dealt with in more detail below.
For some trustees the process of identifying the statutory employers may be quite straightforward. For others it will be a complex process requiring detailed analysis.
The Regulator’s statement can be found here
The statutory definitions
The two basic statutory definitions are found in section 124 of the Pensions Act 1995 and section 318 of the Pensions Act 2004. They are very similar and, in the recent Pilots case, the High Court suggested that there is no practical difference between them. Following the decision in Pilots, it is generally understood that the statutory definitions refer to anyone employing an active member or someone who is eligible to be an active member. This could include employees in waiting periods and those requiring employer consent for scheme entry.
There is uncertainty over the meaning of “active member” where a scheme is closed to future accrual but final salary linkage has been maintained. There is a good argument that members with final salary linkage will be “active members” for the purposes of the statutory employer legislation, but this has yet to be confirmed by the courts or Parliament.
These basic definitions are modified and extended by various regulations for different situations – and it is these modifications which trustees need to consider very carefully.
The Pilots judgment can be found here
Basic statutory definitions of “employer”
Section 124 Pensions Act 1995
“Employer” means the employer of persons in the description or category of employment to which the scheme in question relates.
Section 318 Pensions Act 2004
“Employer” means the employer of persons in the description of employment to which the scheme in question relates.
The statutory employer for scheme funding purposes
This is perhaps the easiest category of employer for trustees to identify and a good starting point. The basic definition is in section 124 (see box above), meaning the employers of active members or eligible members.
The position is different for schemes with no active members. Here it means any employer of active members immediately before the moment when the scheme ceased to have any active members. That employer can subsequently be discharged from its scheme funding obligations if it ceases to be treated as a “former employer” in the same circumstances as described below for employer debt.
Where a scheme has commenced winding-up, the scheme funding provisions will not apply (save in relation to very limited actuarial reporting requirements where winding-up commenced on or after 30 December 2005). The effect of this is that a scheme in winding-up will not generally have a statutory employer for scheme funding purposes.
The statutory employer for employer debt purposes
Things get more complex when identifying statutory employers for employer debt (section 75) purposes. The definition of “employer” is from section 124 of the Pensions Act 1995 as set out above. The regulations then provide that “employers” will include all “former employers” subject to certain exclusions. This broadly means that any entity which has employed an active scheme member or a person eligible to be an active member, at any point since 19 December 1996, other than solely in relation to money purchase benefits, will be a former employer, unless one of the conditions listed below applies.
Click here to view table
So statutory employers will be:
- Any entity currently employing an active member;
- Any entity employing a person eligible to be an active member; and
- Any former employers who have not met one of the conditions listed above.
The position is slightly more complex in relation to schemes which have no active members.
The statutory employer for PPF purposes
The conditions for being a statutory employer for PPF purposes are slightly different to those for employer debt purposes. It is vital for trustees to be able to identify all statutory employers both for levy purposes and, most importantly, for achieving entry to the PPF. Trustees must show that all statutory employers have become insolvent before a scheme can enter the PPF.
Employer for PPF purposes is defined in section 318 of the Pensions Act 2004 (see box above). As mentioned above, it is generally understood that this means anyone employing an active member or someone who is eligible to be an active member.
That definition is then extended by regulations. Where a single employer scheme has no active members it will be the person who was the “employer” immediately before the scheme ceased to have active members. In a multi-employer scheme, statutory employers will include any person who has ceased to be an “employer” unless one of the conditions listed below is satisfied.
Click here to view table
Practical steps for trustees
The first step is to list all the current employers, being those employing active members or those eligible to be active members.
Trustees should then consider the scheme documentation to find other employers which have participated in the scheme. In a well-documented scheme there will be deeds of adherence, otherwise it may be necessary to check scheme contribution records and annual reports and accounts. Care should be taken to identify corporate employers by their registered numbers, rather than names (which may have been changed over time).
Once former participating employers have been identified then trustees should take steps to find out whether they qualify as “former employers”. When did they cease to participate and in what circumstances? Do any of the relevant conditions apply? If not, what is the current status of the former employer? Trustees may need to contact the former employers to obtain employment and payroll records. Other relevant information may be obtainable from HMRC and Companies House.
If no statutory employers can be identified then trustees should inform the Regulator and urgently consider what financial support their scheme has and what additional support can be put in place.
This briefing only sets out a summary of the detailed statutory position, which has been further complicated by case law, and tailored legal advice should be taken where trustees are in any doubt as to the identity of their statutory employers.