Flexible Apportionment Arrangements

Introduction

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”). To assist with the management of employer debts, regulations will come into force on 27 January 2012 introducing a new Flexible Apportionment Arrangement (FAA). The FAA is the latest in a long line of attempts to allow greater flexibility for corporate activity, while maintaining sufficient protection for scheme members.

In this Alert:

• Key points
• Introduction of FAAs
• FAA Conditions
• No change to SAAs
• Period of Grace

Key points

• FAAs were the subject of a consultation over the summer1, but their introduction has been delayed beyond the proposed 1 October 2011 implementation date.
• The amendments to the Employer Debt Regulations2 will now come into force on 27 January 2012.
• Provided certain conditions are met, it will be possible to use an FAA to reapportion liabilities whenever an employer exits a scheme, not just on a corporate restructuring.
• Trustees will have discretion to extend an employer’s “period of grace” up to a maximum of 36 months.

Introduction of FAAs

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”).

An FAA may be used to avoid triggering an ECE, provided certain conditions are satisfied. Under an FAA there is no need to calculate, or to estimate, the amount of a debt as it is the liability (rather than the debt itself) that is being apportioned.

FAA Conditions

An FAA can be used where all of the following conditions are satisfied:

• as with a Scheme Apportionment Arrangement (“SAA”), the “funding test” must be met. Broadly, this addresses the ability of all the remaining employers to fund the scheme and whether the FAA would have an adverse effect on the security of members’ benefits;
• all of the pension liabilities of the departing employer must be reapportioned to one or more of the remaining employers;
• the trustees and the employers who are parties to the FAA must consent in writing to the arrangements;
• the scheme must not be in a PPF assessment period, or be likely to start such a period in the next 12 months.

The FAA can be put in place either before or after an ECE (this includes an ECE which would have occurred but for the operation of the FAA provisions). It will even be possible to use an FAA in a “frozen scheme” (namely, a scheme in which all the employers ceased to employ active members at the same time).

No change to SAAs

There will be no amendments to SAAs, which are currently the most commonly used method of managing employer debts on an ECE. Although an SAA may still be used in the future, the additional flexibility offered by the FAA provisions means that SAAs will probably dwindle in number.

Period of Grace

The amendments also provide for an extended “period of grace”. This facility 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.

Under the regulations, trustees will have power to extend the period of grace up to a maximum of 36 months. An employer wishing to take advantage of the period of grace will also have two months (rather than one) within which to seek trustee permission to do so.

1See our Alert: “Employer Debt Revisted” dated 30 June 2011
2 The Occupational Pension Schemes (Employer Debt) Regulations 2005