multi-employer schemes and the s75 debt – possible changes
by Roderick Ramage, BSc (Econ), solicitor, www.law-office.co.uk
1st published 31 December 2007 (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.
The Occupational Pension Schemes (Employer Debt) (Amendment) and Pension Protection Fund (Multi-employer and Entry Rules) (Amendment) Regulations 2007 - draft not yet brought into force
I had expected that this update would replace the note which I distributed in September 2005 (copy on www.law-office.co.uk) about the circumstances in which a s75 debt is triggered by an “employment cessation event”, which occurs (simplistically) when one employer leaves a multi-employer scheme.
On 7 August 2007 the DWP published a consultation paper called
Amendments to the Occupational Pension Schemes (Employer Debt) Regulations 2005
Consultation on the Draft Occupational Pension Schemes (Employer Debt)(Amendment) and Pension Protection Fund (Multi-employer and Entry Rules)(Amendment) Regulations 2007
and included in it a draft of new regulations called
The Occupational Pension Schemes (Employer Debt) (Amendment) and Pension Protection Fund (Multi-employer and Entry Rules) (Amendment) Regulations 2007
expected to be brought into force in December 2007.
Consultation ended on 1 October 2007, but the regulations have not appeared, from which one may (optimistically) hope, that the consultation process has convinced the DWP that, instead of reforming the existing law and remedying its defects, the new draft was likely to make matter worse. On one key point, the DWP announced, that it was withdrawing the proposal in the draft, which would have had the effect of triggering a s75 debt if a multi-employer (but not a single-employer) scheme closes for the accrual of benefits, ie ceases to have any active members. According to this announcement
“Our intention with regard to that suggested change was to tackle the potential problem of scheme abandonment. But it was not the intention to affect legitimate scheme mergers or transfers, or to trigger a "Section 75" debt when a company closes its scheme to future accruals, whilst continuing to fund the scheme.”
It is likely that a new draft of the regulations will be produced in substantially their present form, but, if the handling of the age equality regulations is any guide, there may be only a very short timescale for their introduction. The following is a summary of the effect of the proposed regulations is brought into force as at present drafted, but subject to the above announcement. This update therefore supplements rather than replaces my previous note.
employment cessation event
This may be redefined to remove the present ambiguity. The present most common interpretation is that an employment-cessation event occurs when an employer ceases to employer any active members of the scheme, but this does not fit comfortably with the wording of article 6(4) of SI 2006/678, which say that it occurs
“in relation to an employer if he ceases to be an employer employing persons in the description of employment to which the scheme relates …”,
which seems to include persons eligible or capable of becoming eligible for membership and arguable also deferred and pensioner members, and not simply those in active membership. Employers might consider exploring this approach in their negotiations with trustees in cases based on employment cessation event before (if at all) there is a new definition.
approved and other withdrawal arrangements
The new regulations introduce three alternatives to the withdrawal arrangement in the existing regulations (see my September 2005 note). In each of these cases the employer is one leaving the scheme.
1 scheme apportionment arrangement
The trustees and the relevant employer may, before or after the date as at which the debt is to be calculated, agree the employer’s share debt. The regulations (demonstrating both the DWP’s propensity for micro-management and its active disbelief in trust law) state, amongst other conditions, that the trustees must be satisfied that the remaining employers will be able and willing to fund the scheme, that it will have sufficient assets to meet its technical provisions (Eurospeak for liabilities) and that the remaining employers will make the payments to the schedule of contributions and any recovery plan in place.
2 regulated apportionment arrangement
Similar to 1, but the arrangement must be approved by the Pensions Regulator (TPR) for approval with the agreement of the Pension Protection Fund.
3 cessation agreement
The employer may, without reference to TPR agree to pay an agreed share of the scheme’s s75 debt to the trustees, if a guarantor is party to the agreement and will be liable for the difference between the agreed share and what would have been the employer’s due debt had there been no agreement. In other words this is much the same as the existing withdrawal arrangement, but TPR is not involved unless clearance is applied for. Again (on the principle of micro-management and cynicism about trustees) the trustees must be satisfied that the remaining employers’ ability and willingness to fund the scheme is not adversely affected by the payment of the cessation agreement share by the employer and that the guarantor is likely to be able to pay its liability.
© Roderick Ramage
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