Changes to employer debt regulations – a helpful respite for many employers?
With effect from 6th April 2018 there will be changes to the employer debt legislation, including the introduction of a new option – the Deferred Debt Arrangement. These changes follow on from a consultation process undertaken by the Department for Work & Pensions in the first half of 2017.
The consultation process related to draft regulatory proposals to allow employers who participate in (often industry-wide) multi-employer Defined Benefit (DB) pension schemes to defer the payment of a section 75 debt upon their ceasing to employ an active scheme member, more commonly known as an ‘employment-cessation event’.
Under existing regulations, if an employer no longer has an active member in the scheme, it automatically triggers a section 75 debt, effectively this is the participating employer’s share of the deficit in the scheme (the difference between the value of the assets and the liabilities) on an insured buyout basis and many employers have found to their cost that they have inadvertently triggered a section 75 debt.
Sadly, many of the employers who originally joined multi-employer DB schemes for the right reasons (pooling of advisory/administration costs, lower investment charges, etc.) are amongst those who can least afford the financial impact of a section 75 debt. Employers come from many industry sectors, however charities and organisations that are ‘not for profit’ such as housing associations, educational establishments, trade bodies, etc., are common participants within these schemes. Smaller, commercial firms, can also be affected. There has been significant press coverage regarding the Plumbing and Mechanical Services Pension Scheme – where many small and often family-owned firms have been forced into insolvency because of the requirement to pay a section 75 debt.
Under the new legislation, employers who have suffered an employment-cessation event and thereby triggered a section 75 debt may now be able to enter into a Deferred Debt Arrangement (DDA). A DDA effectively allows an employer to defer payment of the section 75 debt almost indefinitely, subject to certain conditions. Whilst the DDA is in place, the employer remains liable for their share of the liabilities in the scheme, and will continue to pay the required deficit recovery contributions to ensure that the scheme will meet its projected long-term funding targets.
There are conditions that would need to be satisfied for an employer to obtain a DDA within a multi-employer scheme, and employers need to be fully aware of these. Key considerations are that the scheme trustees must be satisfied that the employer’s covenant is unlikely to weaken materially in the next 12 months and the scheme concerned must not be in the PPF assessment period or be likely to start such a process in the following 12 months.
An employer who has suffered an employment-cessation event can, in the three months after ceasing to employ an active scheme member, apply to the scheme trustees for a ‘period of grace’ of between 12 and 36 months. During this period the section 75 debt will not be triggered – this is a useful concession for employers who fully intend to employ an active scheme member in the future.
We broadly welcome the new legislation as we believe it will be beneficial in some cases, and offers additional options that were not previously available to employers. However, the fact remains that many multi-employer DB schemes are now not fit for the purpose for which they were once intended.
Whilst extended periods of grace/deferred debt arrangements are useful compromises, employers should be looking very closely at these schemes and considering all options available to them. The failure, through insolvency, of employers in certain multi-employer schemes has placed a greater financial burden upon the remaining employers, who need to pick up the costs of the liabilities left behind by the employers who have failed and not paid their full section 75 debt on exit.
Whilst a DDA offers a respite from immediate payment of the full exit debt, it perhaps offers little comfort if the overall debt continues to accelerate through no fault of the participating employer.