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Section 75 employer debt and multi-employer pension schemes

Published Monday, May 21, 2018

Looks at the application of the "section 75 employer debt provisions" to multi-employer pension schemes - such as the Plumbing Pension Scheme

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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.

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 general election, the Government launched a consultation on proposals to introduce a deferred debt arrangement – which would allow employers to defer their debt to a multi-employer pension scheme provided they meet certain conditions. As a safeguard, scheme trustees would need to be satisfied that the “proposed arrangement would not be detrimental to the scheme or its members.” This was intended to be of assistance to employers who “cease to employ any active members of the scheme but want to continue their relationship as a statutory employer to it.” The Government responded to this consultation on 26 February 2018, laying regulations to introduce a deferred debt arrangement before Parliament. They come into force on 6 April 2018 (SI 2018/237).

In its March 2018 White Paper, the Government said it had decided against making further changes on the basis that “existing arrangements provide sufficient flexibility for employers to manage their section 75 debts and that maintaining the current calculation method is the most viable way of ensuring that members receive their pension benefits over the longer term.” (Cm 9591, para 220-32).

The Plumbing Pension Scheme explained that: “in essence the easement allows an employer to exit the Scheme and defer the section 75 employer debt that would have otherwise been triggered. Employers who use this easement will remain responsible for the ongoing funding of the Scheme.” It is currently consulting on the methodology it should adopt for calculating the s75 employer debt in its particular circumstances. Once it has done this, it will begin issuing s75 employer debt notices to businesses that have had a trigger event. It has produced: Employer Consultation 2018 – FAQs.

Background

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. 

Related Library briefing papers include:

SN-04368 The Pensions Regulator: Powers to protect pension benefits (January 2018)

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

SN-04877 Defined benefit pension scheme funding requirements (October 2017)

 

 

Commons Briefing papers CBP-7684

Author: Djuna Thurley

Topic: Pensions

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