Employer Debt Revisited

Introduction

Despite several changes over the years, many still consider that the Employer Debt Regulations1 unnecessarily inhibit corporate activity, in particular the ability of companies to restructure in response to economic changes. The DWP’s latest consultation puts forward draft legislation aimed at addressing these concerns.

Key points

A new option is proposed for dealing with an employer debt, the “Flexible Apportionment Arrangement” (“FAA”).
Provided certain conditions are met, it will be possible to use an FAA in any circumstances, not just a corporate restructuring.
Trustees will have discretion to extend an employer’s “period of grace” up to a maximum of 36 months.
The DWP has decided not to go ahead with certain technical changes to the employer debt legislation.

Background

Generally, if a company exits an underfunded multi-employer DB scheme, its share of the deficit (if any) becomes a debt due to the trustees (the “employer debt”). A debt calculation is currently triggered where an employer has “ceased to employ at least one person who is an active member” of the pension scheme, where another employer with DB liabilities continues to employ at least one active member (this is known as an “employment-cessation event” or “ECE”).

Introduced in April 2010, two easements2 from the employer debt legislation where there is an internal reorganisation have not generally provided sufficient flexibility for companies.

The latest draft amending regulations aim to address this issue while maintaining sufficient protection for scheme members.

Flexible Apportionment Arrangement

Under the draft regulations, an FAA is possible where the following conditions are satisfied:

the “funding test” is met (broadly, this addresses 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);
all of the pensions liabilities of the departing employer are reapportioned to one or more of the remaining employers;
the trustees and the employers who are parties to the FAA consent in writing to the arrangements;
where an ECE has already occurred, no part of the debt must have been paid; and
the scheme must not be in a PPF assessment period or be likely to start such a period in the next 12 months.

If all the above conditions are met then the departing employer(s) does not trigger an ECE and therefore there is no need to calculate an employer debt. Under an FAA it is the liability being apportioned rather than a sum of debt.

The Government’s view is that the funding test will be a sufficient condition for the FAA, and trustees can consider the future outlook of all the remaining employers when carrying out the test.

Period of Grace

Already an integral part of the employer debt legislation, the “period of grace” allows an employer to cease employing an active member of the pension scheme temporarily without triggering an employer debt. However, the employer must inform the trustees that it intends to employ an active member within 12 months, and in fact do so.

Trustees

The draft regulations will give trustees discretion:

to extend the period of grace, up to a maximum of 36 months; and
if an extension has already been provided, to grant a further one subject to the overriding maximum of 36 months.

Employer

In addition, the draft regulations:

propose to increase the period for employers to write to trustees to seek permission to use the period of grace from one to two months; and
confirm that an employer in a period of grace is still an employer for scheme funding purposes.

Technical Amendments

To meet its aim of controlling and reducing the burden of legislation, the Government has decided not to make several technical amendments to the employer debt legislation which have previously been discussed with the pensions industry. Issues which will not be addressed include:

the definition of “active member”; and
the calculation of an employer debt on a “floating”3 basis for the purposes of apportionment arrangements.

However, with regards to “underpin” schemes4 and potentially clarifying the liabilities of “former employers”, the Government will consider legislating once the outcomes of the Bridge5 and Pilots6 cases respectively are known.

Next Steps

The consultation, to which Sackers will be responding, closes on 10 August 2011.

Should these changes go ahead as planned, it seems employers will finally be provided with some much needed flexibility in relation to apportioning their pension scheme liabilities.

1 The Occupational Pensions Schemes (Employer Debt) Regulations 2005
2 Please see our Alert: “Employer Debt-Seven Steps to Heaven?“ dated 18 March 2010
3 Under which the remaining employer agrees to take on the departing employer’s proportion of the scheme’s deficit. When a debt actually arises the amount due may be smaller or larger than the original employer debt.
4 Money purchase schemes with a DB “underpin”, i.e. a guaranteed level of benefits
5 Bridge Trustees Ltd vs Houldsworth and another [2010] EWCA Civ 179. Please see our Alert :”Bridge Over Troubled Waters-Protecting DC Benefits” dated 11 March 2010
6 PNPF Trust Company Limited v Taylor and others [2010] EWHC 1573 (Ch). Please see our Alert, Pilots Case: Charting a Course to Clearer Water?” dated 28 June 2010