Under the employer debt legislation a debt can be triggered when a group employer ceases to participate in a multi-employer defined benefit pension scheme. The default position is that the departing employer must make an immediate payment to satisfy any shortfall in its share of scheme liabilities up to the full annuity buy-out level. A number of easements have been introduced over the years to allow these debts to be apportioned between remaining employers or to be transferred to or guaranteed by other group companies or third parties. Easements were introduced in April 2010 to prevent a debt triggering at all in certain very limited circumstances where there was a corporate restructuring as long as the overall employer covenant was being maintained.
The DWP has now issued consultation on a new flexible apportionment arrangement (FAA) which will be particularly useful for corporate restructurings (circumventing the restrictions of the easements introduced in April 2010). It is proposed that under an FAA the liabilities of the departing employer are reapportioned to one or more employers remaining in the scheme, allowing the departing employer to leave with no ongoing liability to the scheme. Unlike the current corporate restructuring easement, which can be used for transactions between only two employers, there are no restrictions on the number of employers who may take on the liabilities of the departing employer. Under the draft regulations, an FAA may be used where the following conditions are satisfied:
- A prescribed funding test is met looking at the ability of the remaining employers to fund the scheme and confirming that the FAA would not have an adverse affect on the security of members’ benefits;
- All of the pensions liabilities of the outgoing employer are reapportioned to another employer or employers in the scheme;
- The trustees and the employers who are parties to the FAA consent in writing;
- No part of the debt must have been paid; and
- The scheme is not in a PPF assessment period, nor is it likely to be in the next 12 months.
Where a number of employers cease to employ active members of the scheme at broadly the same time only one funding test may be needed. It will be for the trustees to decide if a single funding test can be used to cover a number of transactions.
A further relaxation proposed in the consultation is to allow trustees to extend “periods of grace” to up to 36 months (from the current 12 months). This allows an employer to defer the triggering of a debt where it has temporarily ceased to employ relevant scheme members but intends to do so within the “period of grace”.
The full consultation and draft regulations can been seen here