On 28 July 2011, the Pensions Regulator published a statement, "Identifying your statutory employer", which is directed at helping trustees of schemes with defined benefits to identify their statutory employers.
What is the "statutory employer?"
The statutory employer is legally responsible for:
- meeting the scheme funding objective of the pension scheme.
- paying the "section 75 debt" (the amount an employer must pay to the scheme trustees, calculated on the basis that members benefits are secured by purchasing annuities with an insurance company) in certain trigger events, for instance when a scheme is wound-up or on an employer insolvency.
- triggering entry to the Pension Protection Fund ("PPF").
Identifying the statutory employer
For schemes with active members, identifying the statutory employer should be relatively straightforward – the employer of those members will meet the statutory definition.
The position may be more complicated where employers have left the scheme. Trustees will need to determine whether the previous employer could still fall within the statutory definition of a 'former employer' – this, according to the Regulator, may require the trustees to obtain legal advice.
Where a former employer has been identified, trustees will then need to ascertain whether it has discharged its liabilities to the scheme in respect of the section 75 debt. Trustees will need to approach this with caution as the statutory definition of 'former employer' has changed over the years and interpreted by case law. For schemes which are closed to future accrual, the process of identifying the statutory employer(s) could also be complex, especially in light of the decision in The PNPF Trust Co v Taylor and others  EWHC 1573 (the "Marine Pilots case"). For our briefing on the Marine Pilots case, click here.
The Regulator recommends that trustees will need to request information from the employer(s), such as employment records; historical scheme documentation in relation to employer participation and departures; information from HMRC; details from Companies House; and past scheme accounts.
What should trustees do when the statutory employer is identified?
The trustees will be required to report the information to the Regulator via Exchange from November 2011. Thereafter, trustees will need to monitor the position for any events that could result in the separation of the scheme from its statutory employer, such as on a sale of a statutory employer to a third party purchaser or a re-organisation of the sponsoring employer group.
If the trustees cannot identify a statutory employer
In such circumstances, the trustees should raise the issue with the contributing employer and inform the Regulator. The Regulator expects trustees to investigate why and how the scheme came to be without a statutory employer and states that the trustees should contact the Regulator at the start of any investigations. The Regulator will consider whether use of its anti-avoidance powers is appropriate in such circumstances.
Comment and action
Trustees have always had to identify who has a legal obligation to support their scheme, but from November 2011, the scheme return will expressly require them to provide this information. The identification process may unearth changes to the employers whom the trustees assumed were legally responsible for the scheme. For instance, the covenant assessment may be based on an entity that is not a statutory employer after all and is therefore incorrect. Conversely, the identification exercise may reveal additional employers who do satisfy the definition of a statutory employer. If such discoveries are made, the trustees may need to revisit their assumptions for setting technical provisions, the recovery plan and their investment portfolio to take account of any change to the employer covenant. Perhaps most alarming for schemes would be the risk to members if a scheme were to be precluded from entry to the PPF if there is no identifiable statutory employer to trigger entry.
Time and costs will be incurred in relation to any identification exercise. Given the importance of the exercise and the implications if there are any errors, we consider that trustees and employers may want to adopt a joint approach to determine the correct identities of their statutory employers and to take action now in order to be compliant with the new requirement for scheme returns.