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Section 75 employer debt and multi-employer pension schemes

Published Wednesday, December 6, 2017

Looks at the application of the "section 75 employer debt provisions" to multi-employer pension schemes

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What is the issue?

In March 2015, DWP said concerns had been raised about the way the 'employer debt' provisions were affecting employers in multi-employer defined benefit (DB) pension schemes. In particular, problems were arising when a participating employer stopped employing any active members in the pension scheme. This could trigger a requirement to make a large payment to the scheme - based on that employer's share of the deficit in the scheme calculated on a 'full-buy out basis' (i.e. the amount that would need to be paid to an insurere to take on the pension scheme's liabilities).

DWP explained that although some measures had already been introduced to ease the position for employers, there were differing views on whether these went far enough:

  • Some stakeholders were concerned that some smaller and less financially robust employers are finding the employer debt regime overly onerous: rather than protecting the interests of members, they risked driving some employers out of business unnecessarily;
  • Others were concerned that changing the rules could be destabilising for schemes and increase the risks for members.

 It asking for views on options including:

  • Amending the provisions so that ceasing to employ active members does not trigger employer debt. The debt would still be triggered in the event of employer solvency or scheme wind-up; and
  • Changing the way liability is calculated following an employment-cessation event. 

DWP, Section 75 Employer Debt in Non-Associated Multi-Employer DB Pension Schemes (March 2015)

In its response to this call for evidence, the Pension and Lifetime Savings Association said particular difficulty was caused by the triggering of the employer debt with the departure of the last active scheme member working for a particular employer. On balance it thought the solution should be to change the way the debt was calculated (i.e; to calculate it on a ‘technical provisions’ basis, as applies to ongoing schemes, rather than on the more stringent ‘buy-out’ basis). The Charity Finance Group called for the removal of the rule triggering the debt on the departure of the last active member and for flexible repayments to be allowed.

An Early Day Motion with 57 signatures calls on the Government to respond to its consultation:

That this House expresses concern that changes to pensions legislation intended to ensure that employers meet their pension scheme liabilities are causing unintended financial difficulties for small business owners in non-associated multi-employer pension schemes, including the Plumbing and Mechanical Services (UK) Industry Pension Scheme; notes that the section 75 employer debt is calculated at full buy-out level and includes a share of orphan liabilities, causing debts for employers which can be substantially more than what would be required to meet pension obligations and in many cases threatening their homes and life savings; and calls for publication of a response from the Government to the consultation on section 75 employer debt legislation which closed in May 2015 and for urgent revision of the way this debt is calculated for non-associated multi-employer schemes.

The Plumbing and Mechanical Services (UK) Industry Pension Scheme - an industry-wide scheme covering 400 contributing employers and 36,000 members - ran a consultation on the issue in 2016 and is considering next steps.

In its February 2017 DB Green Paper, the Government said it intended to "consult on a new option employers can consider to manage the employer debt in these circumstances" (Cm 9412, Feb 2017).

Shortly before the 2017 election the Government consulted on draft regulations which would allow employers to defer the requirement to pay an employer debt on ceasing to employ an active member, subject to the condition that the employer retained all their previous responsibilities to the scheme. 

In response to a PQ in September 2017, the Government said it would respond on this issue in its DB White Paper later this winter:

Kirstene Hair: To ask the Secretary of State for Work and Pensions, what steps his Department is taking to prevent financial disbenefit for plumbers affected by section 75 of the Pensions Act 1995; and if he will make a statement.

Guy Opperman: DWP recognises the difficulties multi-employer schemes such as the Plumbers have with the current Employer Debt legislation. The recent Green Paper “Security and Sustainability in Defined Benefit pension schemes” explores these issues and during the consultation period officials have engaged with a range of stakeholders to explore potential legislative changes which could help multi-employer schemes. We plan to respond on this issue in a White Paper later this winter. (PQ 10024, 14 September 2017)

EDM 414 in the name of Jonathan Edwards, and currently with 24 signatures, calls on the Government to reach a solution as a matter of urgency:

That this House holds grave concerns for the hundreds of plumbers in pension schemes who face employer debt under section 75 of the Pensions Act 1995 as subsequently amended; notes that because many of the plumbing businesses are unincorporated, their personal wealth and lifetime savings are at risk; reminds the Government that it has committed to working with the industry in exploring alternative methods to help employers in such pension schemes to manage their employer debt; cautiously welcomes the Green Paper on Defined Benefit Pension Schemes published in February 2017, but has concerns over the progress made to date; and calls on the Government to reach a solution as a matter of urgency.


DB schemes pay pension benefits based on salary and length of service. Because it is important that they are sufficiently well-funded to pay promised benefits as they fall due, they are subject to funding requirements. This means they must undertake periodic valuations and – where a scheme is in deficit - put in place a ‘recovery plan’ (Pensions Act 2004, part 3).

In certain circumstances, the deficit in a DB scheme can become a debt on the sponsoring employer. This can happen if the scheme winds up, if the employer becomes insolvent or there is an application to the Pension Protection Fund. In the case of a multi-employer scheme, the liability is also triggered if one employer ceases to employ any active members in the scheme. (Pensions Act 1995, s75; Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005 No. 678)).

To improve protection for scheme members, the Labour Government changed the employer debt calculation to the more stringent 'full-buy-out' basis (i.e: the amount that would need to be paid to an insurer to take on the liabilities). The then Work and Pensions Minister, Baroness Hollis, explained that there would be some flexibility for employers withdrawing from multi-employer schemes:

The current legislation on withdrawal from multi-employer schemes provides for circumstances where, provided that there are other companies left in such a scheme, a company can withdraw from the scheme and cease to be a sponsoring employer so that it will not be liable for any shortfall if the scheme winds up in the future. Employers can currently do that relatively cheaply, as the withdrawal debt is based on the minimum funding requirement (MFR). Of course the problem with that is that any shortfall then has to be met by the last employer remaining in the scheme, something that is not always possible. That is the dilemma. That would mean that the pension promise was not met, with consequent issues for the PPF. Clause 260 therefore allows for Section 75 of the Pensions Act 1995 to be modified to provide flexibility in calculating the Section 75 debt when a participating employer withdraws from a multi-employer scheme with associated employers. (HL Deb 13 October 2004 s83-4Pensions Act 2004 s270)

Regulations would provide that:

[…] a full buy-out debt will be triggered on withdrawal unless the withdrawing employer puts in place an appropriate financial support arrangement approved by the Pensions Regulator. Once appropriate arrangements are in place, the debt will be recalculated and a scheme-specific debt will be payable. (Ibid)

A review set up by the last Labour Government said employers thought it unfair to require large payments from those departing multi-employer schemes based on a debt that would only arise if the scheme wound up.  (Deregulatory review of private pensions - consultation Paper, March 2007, p29) It recommended that the debt should not be triggered where the covenant to the scheme from the remaining employers remained strong: 

Recommendation 2 - Where there is a group reconstruction of employers in a multi-employer scheme, the principle should be established that the debt should not be triggered where the original covenant was strong, and if the remaining employers’ covenant remains as strong, following the reconstruction, as the original covenant. The judgement as to whether the covenant remains intact should be the responsibility of the trustees, after taking appropriate professional advice. However, one of us (Chris Lewin) recommends that, where the original covenant is potentially weak, provided it remains unchanged after the reconstruction, the debt should still not be triggered. (Report, July 2007).

The Government responded that the intention was to “ensure that an employer cannot ‘walk away’ from their pension obligations without ensuring that they are properly funded” (Government response, December 2007, p14). However, it acknowledged that there were concerns and after consultation introduced a number of changes in regulations (SI 2008/731; SI 2010/725; SI 2011/2973).

As a result, alternatives to the payment of the full s75 debt are available in some circumstances. There is an overview in guidance from the Pensions Regulator on multi-employer pension schemes and employer departures (July 2012).

Related Library briefing papers include:

SN-04368 The Pensions Regulator: Powers to protect pension benefits (May 2016)

SN-04515 Deregulatory Review of Private Pensions (September 2009)

SN-04877 Pension scheme funding requirements (March 2013)



Commons Briefing papers CBP-7684

Author: Djuna Thurley

Topic: Pensions

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