Employers in multi-employer pension schemes will now be able to delay the requirement to pay an employer debt when they cease accrual in the scheme, but opinions are divided on how attractive this will be.
The new deferred debt arrangement was proposed last year, as part of a government consultation that ran from April to May 2017.
Whilst the deferred debt arrangement gives a new option to help employers’ manage their section 75 debts, it remains to be seen how attractive this will be
Stephen Scholefield, Pinsent Masons
The Department for Work and Pensions published the government’s response on Monday, confirming the arrangement.
A sensible way forward
Under current regulation, when an employer opts out of a multi-employer pension fund, it is required to pay an exit fee to the trustees if the scheme is underfunded – leaving many employers with debt they cannot afford to pay.
The deferred debt arrangement proposal was welcomed by the majority of respondents to the consultation, who were mainly those connected with non-associated multi-employer schemes such as faith groups and charities.
The consultation documents said respondents described the arrangement as "being a logical and sensible way forward and, of particular help to charities”, adding that ceasing to employ an active member is “an event that can occur due to matters outside of the control of the employer”.
Respondents also said the arrangement would “strike a reasonable balance” in providing more flexibility for employers while continuing to make sure that scheme funding is protected.
However, some respondents expressed concerns over how helpful the arrangement would be to employers in practice, because of the conditions that had to be met to enter into it and the circumstances in which it could be terminated.
For example, some questioned the need for trustee consent to end the arrangement, given that an employer in a frozen scheme can trigger a debt by giving notice under existing regulation.
'Sword of Damocles' hanging over employers
Stephen Scholefield, pensions partner at law firm Pinsent Masons, said: “Whilst the deferred debt arrangement gives a new option to help employers manage their section 75 debts, it remains to be seen how attractive this will be.”
A funding test is currently required before a scheme or flexible apportionment arrangement can be entered into, but the government is now removing this requirement.
Scholefield said that, notwithstanding the removal of this funding test, there remain “some concerning features” with regard to the deferred debt arrangement.
“First, entering into an arrangement needs the consent of the trustees. Secondly, the employer’s covenant must not be likely to weaken materially in the next 12 months. This may result in some employers continuing with accrual that they cannot really afford,” he explained.
Scholefield also noted that once an arrangement is in force, it can be terminated by the trustees if they believe that the employer’s covenant is likely to weaken materially over the next 12 months.
“This creates a sword of Damocles, hanging over the employer. This is a significant change compared to the position where there is ongoing accrual or where a scheme is frozen. Indeed, some employers may prefer to retain nominal accrual, rather than risk this change in the balance of power with their trustees,” he added.
Workable and attractive
However, John Wilson, head of technical at consultancy JLT Employee Benefits, said while the regulation is designed for specific types of employer and sectors, the arrangement will be very attractive.
He said the outcome of the consultation “is something that’s quite workable, and which we expect to be quite widely used”.
“I’m sure that employers wanting to avail themselves of this option would have liked to have been able to make a unilateral decision on whether to use it or not," said Wilson, but he added: "It was inevitable that the trustees would continue to have a role in this."
Government's s75 proposals are a 'missed opportunity'
Experts welcomed the government’s consultation proposing a new deferred debt arrangement for employers in multi-employer pension schemes, but concerns over complexity of employer debt regulation remain.
When a deferred debt arrangement comes to an end, respondents had felt that it was not clear in the draft regulations whether an employer debt triggers immediately.
“There’s now clarity that, in certain circumstances, the ending of the employer debt arrangement and the triggering of the section 75 debt are mutually exclusive,” Wilson said. It is therefore possible to end the debt arrangement but not immediately trigger an employer debt.
Duncan Buchanan, partner at law firm Hogan Lovells, said that the s75 debt is “a very large amount for most schemes, and it’s felt that that is not an appropriate thing for a non-associated multi-employer scheme”.
