Multi-employer schemes and employer departures

The Regulator published guidance on the complex area of multi-employer schemes and employer departures at the end of November 2010. The guidance applies to employer departures after 5 April 2010 and aims to help trustees and employers of multi-employer schemes understand the different mechanisms by which an employer can leave the scheme.

The guidance stresses the importance for trustees of understanding which employers are responsible for meeting the scheme's liabilities and their financial strength, and of monitoring this on an ongoing basis. When an employer leaves a multi-employer scheme, it is normally liable to pay its share of the scheme's liabilities (the "section 75 debt"). The Regulator reminds trustees that, when considering alternatives, their starting point should be to consider whether it is appropriate for the employer to pay its full section 75 debt. The guidance provides a useful summary of the alternatives to payment in full.

  • No debt due: Two relatively new methods (available since April 2010) allow an employer to leave without becoming liable to pay a section 75 debt: (i) the "de minimis restructuring test" (where the liabilities of a departing employer are minimal); and (ii) the restructuring test (where there is no weakening of covenant).
  • Payment of reduced debt: There are four mechanisms by which an employer can withdraw without paying the full section 75 debt: (i) scheme apportionment arrangement; (ii) withdrawal arrangement; (iii) approved withdrawal arrangement; and (iv) regulated apportionment arrangement.

For each alternative, the Regulator sets out the criteria to be met and the key issues for consideration. The Regulator emphasises that trustees should, in addition to applying the statutory tests, consider their fiduciary duties to scheme beneficiaries and should only agree to a particular method of withdrawal where it is "appropriate to the circumstances". Interestingly, the Regulator has ignored criticism it received during the consultation process and maintains that trustees should, where appropriate, go beyond the requirements of the legislation and seek additional mitigation for the loss of covenant. Due to the complexity of this area, independent professional advice will almost always be required and this is recognised by the Regulator in its guidance.

Monitoring employer support

On 30 November 2010, the Regulator finalised its guidance on monitoring employer support (following earlier consultation covered in detail in our August 2010 E-Bulletin). The guidance sets out the practice that the Regulator expects trustees to follow in assessing, monitoring and taking action on employer covenant.

Key features of the guidance remain relatively unchanged following the consultation. Trustees should have a framework for assessing and reviewing employer covenant including regular monitoring. The Regulator suggests that in most cases an annual review of covenant will be appropriate with a full covenant review taking place every three years before each scheme funding valuation. Employer covenant should also appear as a standing item for discussion at each trustees' meeting. Trustees are encouraged to be proactive and to work closely with employers to ensure that there is adequate security for the pension scheme and plans should be prepared for realising employer support should this become necessary. Trustees should be in a position to act quickly to strengthen scheme security if required. The guidance also covers ways of increasing scheme security such as contingent assets, transfers of non-cash assets to the scheme and pledges.

In response to concerns about costs, the Regulator has emphasised that it "is not intended to cause schemes to spend disproportionate amounts to measure and monitor covenant". However, trustees are also told that they "are accountable to ensure that they have a sufficiently accurate assessment [of covenant] to enable them to take appropriate decisions and actions on funding assumptions, investment allocation and recovery plan shape and duration". Trustees therefore have a difficult balance to strike to ensure that they comply with this duty while keeping a check on costs.

Trustees and employers should familiarise themselves with the guidance as it does represent a significant change in approach and an additional burden on trustees which, somewhat controversially, the Regulator considers trustees should regard "as just as important to the security of the scheme as monitoring fund performance".

Incentive exercises

To try and reduce their pension liabilities, employers sometimes offer an incentive (usually financial) to members to persuade them to transfer out of a defined benefit scheme or accept a reduction in benefits. The Regulator's new guidance on conducting such incentive exercises was issued in December 2010 and takes a stronger stance than its 2007 predecessor. The guidance focuses on the following five key principles to be followed by an employer making an incentive offer.

  • The offer should be clear, fair and not misleading – members should clearly understand the implications of the offer so they can make a fully informed decision.
  • The offer should be open and transparent so that all parties involved in the process are made aware of the reasons for the exercise and the interests of the other parties.
  • Conflicts of interest should be identified and appropriately managed in a transparent manner and, where necessary, removed.
  • Trustees must be consulted and engaged from the start of the process, with any concerns arising through the exercise being alleviated before progressing.
  • Independent financial advice should be made available to all members and promoted in the strongest possible terms.

The emphasis of the new guidance is very much on member protection. Although incentive exercises remain employer driven, trustees are encouraged to take a far more active role in the process. Whilst acknowledging that there may be circumstances where accepting an offer could be in a member's interests, the Regulator suggests that these cases are likely to be in the minority and Trustees are to start from the presumption that incentive exercises are not in members' best interests.