multi-employer
schemes and the pensions debt – 2022 (81)
by
Roderick Ramage, solicitor, www.law-office.co.uk
DISCLAIMER
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 2018 (articles 38)
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 Occupational
Pension Schemes (Employer Debt – Apportionment Arrangements) (Amendment)
Regulations 2008, SI 2008/1068, brought
into force on 15 April 2008;
-
the Occupational
Pension Schemes (Employer Debt and Miscellaneous Amendments ) Regulations 2010,
SI 2010/725, brought into force on 6 April 2010;
-
the Occupational
Pension Schemes (Employer Debt and Miscellaneous Amendments ) Regulations 2011,
SI 2011/2973, brought into force on 27 January 2012;and
-
Occupational
Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2018,
SI 2018/237.
The trigger for the
liability is occurrence of an “employment cessation event”, which is defined in
SI 2005/678 regs 2 and 6ZA as follows:
(1) In these regulations, “employment-cessation
event” means, subject to paragraphs (2) to (7), an event which—
(a) occurs in relation to a multi-employer
scheme,
(b) is not a relevant event, and
(c) subject to regulations
6A andf6F, occurs on the date on which—
(i) an employer has ceased to employ at least
one person who is an active member of the scheme, and
(ii) 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(6A) of the Pensions Act 1995 the insolvency of the
employer, steps which might lead to the scheme’s entry into the Pension
Protection Fund (PPF) or a resolution is passed for a voluntary winding up of
the employer where a declaration of solvency had been made. Paras (2) to (7) are concerned with corporate
restructuring within regs 6ZB or 6ZC.The key point, except in the case of a restructuring under regs 6ZB and
6ZC, 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 five examples showing how and when the debt can arise.
-
A
debt will be triggered, unless the conditions in reg 6ZB or 6ZC are
satisfied, 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.
-
Simplest
of all, a debt will be triggered if one employee is an active member of his
employer’s scheme leaves, dies or retires.
In
all cases there is a “period of grace” of
not over thirty six months (increased from twelve months by
SI 2011/2973) 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 three months (increased from two months from 6
April 2018, and previously increased from one month from 27 January 2012) 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 6) are made or one of the following two exemptions (7 and 8)
apply. In each of
cases 1 to 6 “the employer” is one leaving the scheme.
1 scheme apportionment arrangement (SI 2005/678 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
arrangement must satisfy the funding test (see below).
2 regulated apportionment arrangement (SI 2005/678 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 2005/678 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 2005/678 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.
5 flexible apportionment arrangement (SI 2005/678 reg 6E)
This is broadly similar to 1, but (a) a debt is not
triggered, so there is no need for it to be calculated, and (b) what are
apportioned amongst one or more remaining employers are the employer’s
liabilities, actual or contingent, as though its employees had been employed by
the remaining employers. The remaining
employers would pay the debt, including the apportioned liabilities, when their
own debts are triggered. The funding
test must be satisfied.
6 deferred debt
arrangements (SI 2005/678 reg 6F)
Although this arrangement was aimed at industry wide
pension schemes, in which the employers are not associated with each other, it
may be used by multi-employer schemes with associated employers. The trustees may agree an arrangement with
the employer, if the scheme is not being wound up or in a PPF assessment period
and the trustees are satisfied that a PPF assessment period would be unlikely
and the employer’s covenant unlikely to weakened within twelve months of the
arrangement taking effect. While the
arrangement is in force, the liability to pay the s75 debt is deferred and the
employer remains an employer in relation to the scheme, retaining its
responsibilities including scheme
funding. The regulation specifies the
events on which the deferred arrangement terminates.
funding test (SI 2005/678 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
6ZC.
7 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
8 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.
exemption procedures
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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