The Government is proposing to amend (for a twelfth time!) the rules about employer debt under s75 Pensions Act 1995. The amendments would make it easier to vary the basis on which liability is shared between employers.
Background – the Regulations as they stand
Under a multi-employer DB scheme, each employer is potentially liable to make good a share of any buy-out deficit, either on winding-up or where one employer stops employing active members at a time when other employers continue to employ them. Regulations specify a default basis for determining the employers’ respective shares of the buy-out deficit. Under the default basis, an employer’s share depends on the scheme liabilities which relate to that employer.
But the shares of employers can be varied, using a so-called scheme apportionment arrangement.
Flexible apportionment arrangements – the next big thing?
Under the Government proposals, the scheme apportionment arrangement option will remain, but it will apply only where another employer agrees to pay a fixed cash sum to the scheme, representing a departing employer’s actual s75 debt.
The Government plans to introduce a new alternative – the flexible apportionment arrangement (“FAA”) – under which the departing employer’s liability is “apportioned” to another employer but the amount which the other employer will have to pay “floats”, so that it shrinks if the buy-out deficit shrinks and gets bigger if the deficit itself gets bigger.
In more details, under an FAA, trustees would be able to release an employer (“A”) from all of its liability under s75, provided that another employer (“B”) agreed to step into A’s shoes for the purpose of the Regulations. If and when B subsequently became liable to pay a s75 debt, its share of deficit would be calculated on the basis of scheme liabilities relating to both A and B. So, put crudely, what gets apportioned to B are A’s scheme liabilities – whereas, under an SAA, what gets apportioned is an amount of A’s s75 debt.
Trustees cannot currently put a scheme apportionment arrangement in place unless a “funding test” is met. A similar rule would apply in respect of FAAs, but the Government proposes that there should be greater flexibility. If a number of FAAs were to take effect at much the same time, trustees might determine that only one funding test was needed.
The Government proposes some other minor amendments to the Regulations. In particular, trustees would be given the option to extend the “period of grace” for s75 purposes, in circumstances where an employer temporarily stopped employing active members. If trustees so chose, the prescribed 12-month period could be stretched to anything up to three years, so that no s75 debt is due from that employer provided that it starts employing active members again some time in that three-year period.
The Government has shied away from addressing some significant ambiguities in the Regulations, for example about what it means for an employer to trigger a s75 debt by ceasing to employ “active members”. This was on the agenda last year.. But the Government says that, in view of the drive towards deregulation, any bottom-up review of the legislation has been shelved.
The FAA concept is appealingly simple: one employer agrees to take over the s75 responsibilities of another. Provided the Government gets the small print right, FAAs are likely to become commonplace on corporate sales and restructurings, while old-style scheme apportionment arrangements are likely to be rare.
However, the new FAA concept as described in the consultation is disappointingly inflexible in at least one respect, as it would be available only on an all-or-nothing basis. It seems not to provide for the possibility that the departing employer pays say half of its normal s75 debt and the other employer steps into its shoes for only the other half of the departing employer’s liabilities.
It is also disappointing that the Government has dropped its plan to overhaul the Regulations. They are a confusing hotchpotch, and some key provisions are unclear. If the aim of the deregulatory review is “to make the private pensions framework simpler”, the employer debt legislation would be a good place to start.
Although the Government originally hoped that the changes would come into effect on 1 October, recent silence suggests that some delay is possible.
But assuming that something comes of these proposals, trustees of multi-employer DB schemes can expect employer proposals for FAAs to start dropping on their desks in due course.