Employer’s Pension Debts

Consultation on New Deferred Debt Arrangements

A government consultation in relation to the employer debt regime in multi-employer pension schemes has recently closed.  This consultation introduced a new mechanism for deferring debts which may be of particular interest and help to employers such as charities who participate in multi-employer schemes where the employers are not associated with one another.

Such employers very often have not been able to make use of the existing arrangements for managing the employer debt which arises when they cease to employ active members in the scheme.  This cessation would normally trigger a debt to be paid by the employer based on its share of the scheme deficit, which could in many cases be significant.  This subject has been discussed in previous editions of our Charities Focus newsletter

Existing mechanisms, including apportionment arrangements, are not available to these employers, as there is no associated employer to take on the debt of that employer when it ceases to employ active members.

The new mechanism proposed, known as a "deferred debt arrangement", would mean that a debt would not be triggered in such circumstances, so long as the employer continued to meet its ongoing funding obligations.  This arrangement would be subject to the written consent of the trustees, and would merely defer the payment of the debt, rather than extinguish it.  In addition, the trustees would need to be satisfied that the "funding test" is met - that is, the employers in the scheme will be able to continue to fund the scheme so that it will have sufficient assets to secure members' benefits up to its "technical provisions" - the amount needed to fund the scheme's liabilities.

Accordingly, this route would not be appropriate in situations where an employer is being sold out of a group and the buyer wishes to take that employer free of any pension liability, or to companies restructuring.

The deferred debt arrangement may come to an end in a number of circumstances, including where an insolvency event occurs in relation to the deferred employer, or where the deferred employer or the scheme winds up or a freezing event occurs (e.g. the scheme ceases to have active members), the employer "restructures" (presently undefined in the draft legislation), the trustees give notice that the arrangement has come to an end, or the employer starts to employ at least one active member again.

Apart from the latter case, where the employer will be treated as if no debt had been triggered, the debt will become due at the point the arrangement ends.

While on the face of it the new arrangement will be of help to small employers who participate in large non-associated multi-employer schemes, there are also some other factors to consider.  In many cases, the employer may have little control over whether or when the arrangement is brought to an end.  Further, as the debt due is calculated at the time the arrangement ends, it may be, depending on the performance of the scheme since the date the arrangement was entered into, that the debt could have increased in that time.  In addition, other employers may have left the scheme thereby increasing the share of the liabilities payable by the remaining employers.

The new deferred debt arrangement may therefore be of assistance to small employers, particularly charities, but this may simply defer the problem to a later date (and result in an increased debt payable) and at the risk of losing control of the timing of the debt payment.  The trustees could, as they must consent to the arrangement, decide to enforce the debt in any event, regardless of the financial position of the employer ceasing to employ active members.  Whether any of these concerns will be addressed in the final legislation, which is due to come into force 1 October 2017, remains to be seen.

Posted on: 02/06/2017

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.

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