multi-Employer Pension Schemes – increased liabilities on ceasing to participate
by Roderick Ramage, solicitor, www.law-office.co.uk
1st published 2 September 2005 (distribution to professional contacts)
This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.
When two or more company participate in a pension scheme and one of them leaves the scheme and the scheme is in deficit, that company becomes liable a debt on the employer under s75 of the Pensions Act 1995. The effect of the Occupational Pension Schemes (Employer Debt) Regulations 2005, SI 2005/678 (in force on 6 April 2005) as amended by SI 2005/2224 is that the amount of the debt is calculated as the cost of buying annuities as estimated by the scheme’s actuary instead of on the MFR basis. Although this applies primarily to final salary schemes, money purchase scheme too can have a debt, if there is a deficit because of the Pension Protection Fund levy or what the regulations call a “criminal deficit”.
The trigger for the liability has not changed, but is now called an “employment cessation event”. The key point is that the liability arises not on (eg) the disposal of the employer but on the employer ceasing to employ persons of the description of employment to which the scheme relates. Here are four examples showing how and when the debt can arise.
- A debt will be triggered if an employer is reconstructed in such a way that it ceases to employ any persons who belong to are or eligible to belong to the scheme.
- If the employer is sold and pension scheme membership for its employees ceases on completion, the liability will crystallise at completion.
- The liability can arise after completion if the target company continues to participate in the scheme for a period: this, often called an interim period, can be until the next renewal date plus a further 12 months.
- On an assets sale, if it is arranged for the buyer to participate in the scheme for an interim period, the buyer will become liable for the debt on ceasing to participate at the end of the interim period.
The debt attributable to the leaving employer will be its proportion of the debt for the scheme as a whole based on the amount of its liabilities in relation to the total liabilities.
The amending regulations provide that if, on an employment cessation event on or after 2 September 2005, a “withdrawal arrangement” has been approved by Pensions Regulator and the agreement has guarantors for the debt, the leaving employer’s debt may be calculated on the MFR basis, and that the Pensions Regulator may issue a direction deferring the payment of the balance of the debt for such period as is specified, not later than the winding up of the scheme or the last participating employer ceasing to be an employer or becoming insolvent.
copyright Roderick Ramage
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