New Proposals On Changes To Employer Debts Under Section 75 Pensions Act 1995

Under existing legislation where an employer ceases to participate in a multi-employer scheme and the scheme has a deficit on a "buy-out" basis, the leaving employer will owe a debt to the scheme equal to a share of the deficit. There are currently several ways in which leaving employers can reduce the amount of such a debt but much uncertainty has surrounded how these provisions actually operate in practice. As a result, on Tuesday, DWP issued a consultation paper setting out proposals to amend the existing legislation (including draft Regulations).

The key proposals are as follows:

1. When valuing a scheme’s assets and liabilities to determine the amount of any debt, money purchase assets and liabilities are to be disregarded. Where the only liabilities in relation to a particular employer are money purchase, the debt provisions will not apply to that employer. DWP say that the "policy intention has always been that Section 75 should not apply to money purchase benefits".
2. An employer will be treated as ceasing to participate in a multi-employer scheme when it ceases to have active members. Currently participation is treated as ending when an employer stops employing actives and anyone eligible to become an active member. The draft Regulations also allow for a 12 month period of grace if the employer notifies the trustees that it intends to have actives again within that period.
3. The debt due from a leaving employer will be based on its share of the liabilities, unless one of the alternatives set out below applies. It is now clearly set out in the draft Regulations that liabilities attributable to each employer are determined by reference to pensionable service with that employer. If a member has had pensionable service with several employers and it is not possible to attribute pensionable service to each employer or a "disproportionate cost" would be incurred in doing so, it will be attributed to the last employer. If it is not possible to ascertain the last employer then it will be treated as orphan liabilities.
4. The proposed alternative ways of dealing with a leaving employer's liabilities are as follows:

• Scheme Apportionment Arrangements: Apportionment (i.e. specifying how the debt should be quantified for a leaving employer to give a different result than would otherwise apply) will be permitted (regardless of the provisions of the scheme rules) with the agreement of the trustees. The trustees will need to be satisfied that the remaining employers are able and willing to properly fund the scheme.

• Regulated Apportionment Arrangements: Will require the approval of the PPF and the Regulator and are intended to be rare. The Regulator may approve such an arrangement if it thinks that it will result in better funding for the scheme than if an employer insolvency event occurred in relation to one of the employers, and the scheme must be likely to enter a PPF assessment period in the next 12 months.

• Cessation Agreements: The leaving employer will need to pay to the trustees at least its share of any shortfall calculated on the scheme-specific funding basis (as opposed to the buy-out basis). This payment can be made in installments. Guarantors must agree to pay the balance of that employer’s share of the buy-out debt when the scheme winds-up or ceases to have any solvent employers. Before entering into a cessation agreement, the trustees must broadly be satisfied that this will not affect other employers’ commitment to the scheme and that at the date of the agreement the guarantors are likely to have sufficient assets to pay the amount guaranteed.

• Withdrawal Arrangements: These exist currently and are similar to cessation agreements but require the approval of the Regulator. They also allow flexibility in the amount to be paid by the guarantors (either it can be determined as for a cessation agreement or can be the full buy-out debt at the date of wind-up). It is proposed that if the Regulator agrees, the leaving employer may pay a smaller amount than would be required under a cessation agreement.

It is intended that none of the above types of arrangement will be treated as Compromise Agreements for the purpose of the PPF and should not therefore prevent schemes which have one in place from subsequently entering the PPF.

It is not certain when these changes are intended to come into force, but the draft Regulations are currently dated December 2007. Consultation closes on 1 October 2007.

A full copy of the consultation paper and draft Regulations is available here.

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This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 08/08/2007.