Multi-employer schemes and the pensions debt – 2008 update

by Roderick Ramage, solicitor,

first posted on this site on 10 October 2008



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.

This supersedes my note of 2 September 2005


When two or more companies participate in a pension scheme and one of them “leaves” the scheme and the scheme is in deficit, that company becomes liable for a debt on the employer under s75 of the Pensions Act 1995.  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 broad principles under the Occupational Pension Schemes (Employer Debt) Regulations 2005, SI 2005/678 remain, but have been substantially altered in detail by the Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments ) (Amendment) Regulations 2008, SI 2008/731, brought into force on 6 April 2008.

The trigger for the liability is occurrence of an “employment cessation event”, which is defined in SI 2005/678 reg 2 as:

“an event which is not a relevant event and which, subject to regulation 6A, occurs on the date on which—

(a)     an employer has ceased to employ at least one person who is an active member of the scheme, and

(b)     at least one other employer who is not a defined contribution employer continues to employ at least one active member of the scheme.”;

Relevant event is, as defined in s75 of the Pensions Act 1995 the insolvency of the employer or steps which might lead to the scheme’s entry into the Pension Protection Fund (PPF).

The key point is that the liability arises not on (eg) the disposal of the employer but on the employer ceasing to employ an active member of the scheme.  (Under the original regulations, it was 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 company is reconstructed as part of a group reorganisation in such a way that it ceases to employ any active members the scheme.

-      If the employer company 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 employer company continues to participate in the scheme for a period and then ceases.

-      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.

In all cases there is a “period of grace” twelve months from the employment-cessation event or, if earlier,  the day on which the employer employs a person who is an active member of the scheme, if on or not later than one month after the event the employer written notice to the trustees of his intention during the period of grace to employ at least one person who will be an active member of the scheme: SI 2005/678 reg 6A.

The amount of the debt is calculated as the cost of buying annuities as estimated by the scheme’s actuary. 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 unless one of the following arrangements are made.  In each of these cases the employer is one leaving the scheme.

1        scheme apportionment arrangement (SI 1995/678 reg 6B)

The trustees and the employer may, before or after the date as at which the debt is to be calculated, agree the employer’s share of the debt, which may be nil.  The remaining debt, if there is more than one remaining employer, is apportioned amongst some or all of them.  The arrangements must satisfy the funding test (see below).

2        regulated apportionment arrangement (SI 1995/678 reg 7A)

This is similar to 1 and applies to scheme already in or in the trustees’ opinion likely to go into a PPF assessment period.  Such an apportionment cannot me made unless the Pensions Regulator (TPR) approves it and the PPF does not object to it

3        withdrawal arrangement (SI 1995/678 reg 6C)

A withdrawal arrangement similar to that under the regulations before 6 April 2008 may be made, but without TPR’s approval.  The withdrawing employer must pay Amount A, which is its share of the scheme’s deficit on a scheme specific funding basis, and one or more guarantors, who may be or include the remaining employers in the scheme, guarantee Amount B, which is the balance of the s75 debt.  The funding test must be satisfied and (on the DWP’s principle of micro-management and active disbelief in trust law) the trustees must be satisfied that the guarantor has sufficient financial resources to honour the guarantee. 

4        approved withdrawal arrangement (SI 1995/678 reg 7)

This is similar to 3 and applies if Amount A is less than the scheme specific deficit.  The funding test must be satisfied and the arrangement must be approved by TPR.

funding test (SI 1995/678 reg 2(4A))

The funding test is met (paraphrasing the statutory definition) where the trustees are reasonably satisfied that the remaining employers will be reasonably likely to be able to fund the scheme and that it will have sufficient and appropriate assets to cover its technical provisions (Eurospeak for liabilities), and, in the case of a scheme apportionment arrangement, the effect of the arrangement will not be to adversely affect the security of members' benefits.



copyright Roderick Ramage

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