On 6 April 2018, new regulations will come into force, making a number of changes to the employer debt legislation. In this insight, we look at what is changing and how the changes will help pension scheme employers and trustees.
A new option | Deferred Debt Arrangement
The regulations introduce a new option for employers and trustees when there is an employment-cessation event. This new option is called a Deferred Debt Arrangement (DDA).
A final salary scheme with more than one employer is a ‘multi-employer scheme’. An employer in a multi-employer scheme will suffer an ’employment-cessation event’ if it stops employing active members of the scheme at a time when at least one other employer continues to do so. The starting position is that an employment-cessation event will trigger a section 75 debt, but employers and trustees have a number of options that give them some flexibility when this happens. The DDA will give them another.
What will a DDA do?
A DDA will allow an employer who has suffered an employment-cessation event to defer payment of their section 75 debt. During the deferral period, the employer will retain all of its responsibilities in relation to the scheme, including scheme funding.
Which schemes could a DDA help?
The policy intention is that the DDA be used in non-associated multi-employer schemes. Non-associated multi-employer schemes are schemes where there is more than one employer, but the employers are not connected. An example would be an industry-wide scheme. However, the regulations are wide enough to allow a DDA to be used in any multi-employer scheme.
What conditions must be met?
Under the Regulations, trustees will be able to agree to a DDA if:
- the scheme is not in a PPF assessment period or being wound up;
- the trustees are satisfied that the scheme is unlikely to go into a PPF assessment period in the next 12 months; and
- the trustees are satisfied that the employer’s covenant is unlikely to weaken materially in the next 12 months.
The covenant test relates to the covenant of the employer who has had the employment-cessation event . The initial draft of the regulations referred to the ‘scheme funding test’. However, the government has agreed that the scheme funding test should not be applied. It usually applies in cases where pension debts or liabilities are being transferred to other employers and this will not be the case with a DDA.
How long will a DDA last?
A DDA will end when the first of the following occurs:
- the employer and the trustees agree to bring the DDA to an end;
- the employer starts to employ an active member;
- the employer suffers an insolvency event;
- all of the scheme employers have suffered an insolvency event or entered DDAs;
- the scheme starts to wind-up;
- the deferred employer restructures (subject to limited exceptions);
- there is a ‘freezing event’ for the scheme; or
- the trustees give notice to end the DDA.
The trustees will only be able to give notice to end the DDA in limited circumstances. These are that: employer has failed to comply ‘materially’ with its scheme funding obligations; the employer’s covenant is likely to weaken ‘materially’ in the next 12 months; or the employer has failed to comply ‘materially’ with its duties, under the Scheme Administration Regulations, to tell the trustees about an event relating to it which is likely to be of material significance to the trustees, or to give the trustees such information as they reasonably request to perform their duties.
What happens at the end of the DDA?
This depends on the reason why the DDA came to an end. In some cases, the end of the DDA will be treated as an employment cessation event (and so a trigger for a section 75 debt). In other cases, for example if the employer starts to employ an active member, the outcome will be different.
What else is changing?
Other changes made by the new regulations include the following:
Period of grace
An employer who has suffered an employment-cessation event but intends to employ another active member in the near future can give notice and get a ‘period of grace’ of 12 to 36 months. Provided the employer starts to employ another active member before the period of grace comes to an end, there will be no trigger for a section 75 debt.
As the legislation currently stands, an employer must give the trustees notice of a period of grace before, on the same date as, or within two months after, the date of its employer-cessation event. The new regulations increase two months to three, giving an employer more time to give the trustees notice of a period of grace.
The period of grace option is also being changed to reflect the introduction of the DDA. If employer in a period of grace decides not to employ another active member, it will be able to ask the trustees to agree a DDA.
The restructuring easements are intended to allow the pensions responsibilities of one employer to be transferred to another employer as part of a business restructuring without triggering an employment-cessation event. They are only available if certain requirements, designed to protect the security of members’ benefits, are met.
At the moment, the easements aren’t as helpful as they could be for charities who are trying to incorporate and partnerships who are trying to convert to Limited Liability status. In other words, in cases where an organisation wants to transfer its business and pensions liabilities to its new incorporated, or limited liability, self. The new regulations make changes to the easements to try and address this.
How will these changes help employers and trustees?
All of these changes bring welcome clarity and flexibility.
The new Deferred Debt Arrangement could be particularly helpful for the employers and trustees of non-associated multi-employer schemes, such as industry wide schemes. However, it could also be helpful in other cases where an employment-cessation event occurs, but there are practical barriers to transferring the pensions liabilities of one employer to another employer in the same scheme.
The DDA does not solve the problem of orphan liabilities. However, given the difficulty of finding a solution that balances the interests of employers and other stakeholders, it remains to be seen whether the government can or will take action here.