Background
If a participating employer ceases to employ any active members in a pension scheme, a “section 75” debt becomes due from that employer, representing his “share” of the difference between the scheme’s assets and the cost of buying out all its liabilities with an insurance company.
There are several ways in which employers ceasing to participate in a multi-employer scheme can reduce the amount of debt they are required to pay under section 75, for example:
- entering into a scheme apportionment arrangement (if permitted by scheme rules),
- a withdrawal arrangement or approved withdrawal arrangement or
- avoid triggering a debt by satisfying the conditions of the general or de-minimis easement.
However, these arrangements can be costly and time-consuming, particularly for an internal group restructuring which does not impact on the security for members’ benefits but happens to involve a participating employer ceasing to employ active members of the scheme.
The current scheme apportionment arrangement involves an apportionment of the section 75 debt from the departing employer (“Employer A”) to one or more remaining employers: thus the debt still has to be calculated even if it is not going to be paid. The trustees in particular have to be satisfied that the apportionment will not have any adverse effect on the future funding of the scheme.
The Government’s proposals
The latest proposal is for a new arrangement called the “Flexible Apportionment Arrangement” (“FAA”), involving an apportionment of Employer A’s scheme liabilities, rather than of the debt. There are no restrictions on the number of employers who may take on the liabilities of Employer A.
A FAA may be used where the following conditions are satisfied:
- the funding test is met;
- all Employer A’s pension liabilities under the scheme are transferred to one or more employers who still employ active members in the scheme;
- the trustees and the employers who are parties to the FAA consent in writing to the arrangements;
- where an employment-cessation event has already occurred, no part of the debt has been paid and
- the scheme must not be in a Pension Protection Fund (PPF) assessment period or likely to start such a period in the next 12 months.
The funding test is concerned with
- the ability of all the remaining employers to fund the scheme and
- whether the FAA would have any adverse affects on the security of members’ benefits.
Apart from corporate restructuring the Flexible Apportionment Arrangement can be used in other circumstances too, for example where an employer’s last active member retires or resigns. The advantage of the Flexible Apportionment Arrangement is that an employer debt need not be calculated each time an employer ceases to employ an active member of the scheme.
The FAA may appear to be similar to the General Easement. However, the General Easement requires that all employer A’s corporate assets be passed to the replacement employer as well as the pension liabilities. This is not necessary under the FAA.
After a FAA the scheme remains eligible for PPF protection but Employer A will cease to be an employer for PPF purposes.
The existing regulations provide a “period of grace” of 12 months such that, if an employer ceases to employ any active members but employs one or more such members within 12 months, no debt is triggered. The new draft regulations extend the period to 3 years, at the discretion of the scheme trustees.
Consultation on the draft regulations closed in August but actual legislation is not expected before December.