Consultation on the draft Occupational Pension Schemes (Employer Debt) (Amendment) Regulations 2017 – Sackers’ response to DWP consultation

Background

The DWP is seeking views on proposed changes to employer debt legislation for employers in non-segregated defined benefit multi-employer pension schemes.

In this response:

• Introduction
• Chapter 2: The deferred debt arrangement

Introduction

We understand that the Legislative & Parliamentary Committee of the APL are commenting on the technical detail of the draft regulations and have therefore restricted our response to the high-level questions.

Chapter 2: The deferred debt arrangement

Question 1 – We would welcome your views on the deferred debt arrangement proposal. In particular, will it be helpful to employers of non-associated multi-employer schemes in managing an employer debt when they cease to employ an active member?

Subject to the concerns outlined below, the proposed deferred debt arrangement (“DDA”) would make it possible for a single employer to freeze its liability to a multi-employer scheme while the other participating employers continue to employ actives. This is an attractive concept and, as noted in the consultation, would be a helpful option for employers who are looking to manage their employer debt but cannot agree a flexible apportionment arrangement (“FAA”).

Question 2 – Will the proposed conditions to enter into a deferred debt arrangement work in practice for the employer and the trustees and managers of the scheme?

We recognise the policy objectives behind the proposed conditions (as set out in the consultation at paragraphs 2.3 – 2.9) and agree that they would be achieved.

However, we note that this does not fully address the “lack of parity between multi-employer schemes and frozen single employer schemes” identified in paragraph 1.10. This is because the proposed conditions for a DDA do not need to be met in order to freeze a scheme in its entirety (whether it is a single employer or a multi-employer scheme).  In practice, the fact that the proposed conditions are closely aligned with those applicable to an FAA may mean that a DDA is unlikely to be used where an FAA would be available (especially taken together with the circumstances in which a DDA would end).

We also note that it remains the case that there is a “gap” in the options available under the Regulations in circumstances where the funding test is not met, but there is not a reasonable likelihood of an assessment period commencing within 12 months.”

Question 4 – Do you agree with the list of circumstances in which the deferred debt arrangement would end, and can you identify any other circumstances in which it will end?

The proposed circumstances in which the DDA would end are very broadly drawn. We appreciate that this may be intended to make a DDA attractive in only very limited circumstances.  However, we are concerned that the extent of the trigger events for the end of a DDA might deter even those at whom a DDA is aimed from entering into such an arrangement.

In particular:

• Event 6F(5)(b) – we would query why a deferred employer which wishes to bring a DDA to an end by setting a date for the section 75 debt to fall due should be required to obtain the agreement of the trustees. In contrast, under regulation 9(4) of the Occupational Pension Schemes (Employer Debt) Regulations 2005, an employer in a frozen scheme can give a unilateral notice to trigger a debt.
• Event 6F(5)(d) – “the date on which the deferred employer restructures”. Unless it is defined, “restructures”, could capture a wide-range of events. If there are particular circumstances in which the DWP considers automatic termination to be appropriate (perhaps where a restructuring will result in a detriment to the scheme) these should be specified.
• Event 6F(5)(e) – while it makes sense for a DDA to come to an end in such circumstances, it is not clear to us why such an event should trigger a debt.

DDAs are primarily aimed at non-associated schemes. Over time, they could result in there being schemes with a large number of deferred employers and only a small number of employers with actives. When the last employer ceases to have an active member (for whatever reason), that last employer will not trigger a debt, but as a result of event 6F(5)(e), a debt will be triggered for all of the deferred employers. We cannot see any policy reason for this outcome.  It would make it critical for employers covered by DDAs that at least one employer continues to employ actives.  This seems at odds with the concern which the DDA mechanism is designed to address.  We consider that it would be more appropriate for the deferred employers to become frozen employers when the last employer ceases to participate.

• Event 6F(5)(f) – “the date on which the trustees…, being reasonably satisfied – (i) that the deferred employer has failed to comply with its obligations under the Scheme Funding Regulations, or (ii) that the deferred employer’s covenant to the scheme is likely to weaken in any other way in the next 12 months, serve a notice on the deferred employer stating that the [DDA] has come to an end”.

This power is very broadly drawn. We believe that the threat of the trustees being able to trigger the full employer debt (which, given the circumstances in which a DDA is intended to be used, may well cause the deferred employer to become insolvent) would be sufficiently unattractive that employers may prefer the certainty of continuing to accrue “unaffordable” benefits rather than enter into a DDA.

We also question whether it is appropriate for trustees to have what may amount to a very broadly drawn discretion as to whether (or the point at which) the deferred employer should enter an insolvency process. This may be unattractive from a public policy perspective, particularly given the relatively narrow duties and considerations which the trustees would be required to consider in exercising this discretion. We note that the consultation implies (at paragraph 2.14) that the power should be exercised if it is “no longer in the interests of the scheme” for the DDA to continue. This would appear to suggest that the power should be exercised if the trustees would expect to obtain a higher overall recovery from the deferred employer by ending the DDA (even if that recovery would be through an insolvency process).

In this context it would be helpful for trustees to have further guidance (either in the legislation itself or, for example, from the Pensions Regulator) as to the circumstances in which the power should be exercised.