schemes and the pensions debt – 2010 update (31)
Roderick Ramage, solicitor, www.law-office.co.uk
posted on this site on 12 May 2010
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.
my note of 10 October 2008 (25)
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 first by the Occupational Pension Schemes
(Employer Debt and Miscellaneous Amendments ) (Amendment) Regulations 2008, SI
2008/731, brought into force on 6 April 2008, and now by the Occupational
Pension Schemes (Employer Debt and Miscellaneous Amendments ) Regulations 2010,
SI 2010/725, brought into force on 6 April 2010.
The trigger for the
liability is occurrence of an “employment cessation event”, which is defined in
SI 2005/678 reg 2 as:
event which is not a relevant event and which, subject to regulation 6A, occurs
on the date on which—
an employer has ceased to employ at least one person who is an active member of
the scheme, and
at least one other employer who is not a defined contribution employer
continues to employ at least one active member of the scheme.”;
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.
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 employer company is sold and pension scheme membership for its employees
ceases on completion, the liability will crystallise at completion.
liability can arise after completion if the target employer company continues
to participate in the scheme for a period and then ceases.
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 either one of the following
arrangements (1 to 4) are made or one of the following two exemptions (5 and 6)
apply. In each of
cases 1 to 4 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.
exemptions for restructuring
The two exemptions and
the (micro-managed) procedures for them are in regs 6ZA to 6ZD added by the
2010 regulations as regs 6ZA and 6ZD in the 2005 regulations. The effect of the exemptions is that there is
no employment cessation event if there is a restructuring within regs 6ZB or
5 general exemption (SI 2005/678 reg 6ZB)
The new employer takes
responsibility for existing employer’s liabilities on the trustees being
satisfied that it is at least as likely as the existing employer to meet them
6 de minimis exemption (SI 2005/678 reg 6ZC)
There are not more than two
employees or (if higher) 3% of the members with accrued rights and the annual
amount of pension in respect of them does not exceed £20,000 in the year from 6
April 2010 increased by £500 pa for each subsequent year and the trustees are
satisfied that the scheme is fully funded on the PPF basis. If there is a second restructuring within
three years, the total number of members must not exceed five or (if higher)
7.5% and the annual pension must not exceed £50,000.
The regulations prescribe detailed procedures,
consisting of seven steps for the general exemption and five for the de
minimis, which must be completed in the right order and in accordance with the
regulations. An employment cessation
event occurs if it becomes apparent within six years of a restructuring that,
under either exemption, the restructuring is not implemented and reported to
the trustees or, in connection with the general exemption, incorrect or
incomplete information was given to the trustees, and the trustees are
satisfied that, had correct or complete information been given, they would have
reached a different decision. The
timescale to complete the restructuring is 18 weeks from the trustees notifying
the employers of their decision in relation to the restructuring proposal or
such longer period not exceeding 36 months as the trustees choose.
copyright Roderick Ramage
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