Schemes called to engage sponsors over s75 debt

Schemes need to engage with employers to make sure they take advantage of grace periods in the legislation, which the government is reviewing, to avoid costly debt exercises, lawyers urged.

Where the debt payment is triggered by an insolvency event, schemes should leverage sponsors to appoint an insolvency practitioner to ensure assets are not passed to other unsecured creditors in advance of themselves.

These actions will save schemes from spending on third-party advice for unnecessary debt exercises in the first instance, and help retain the highest possible level of assets for their members in the second.

Following section 75 of the 1995 pensions act, the employer of an occupational pension scheme takes on the shortfall between scheme assets and liabilities as a debt to the scheme where one of the following events happens:

1. The scheme winds-up;

2. An employer becomes insolvent;

3. Participating employers cease to have any active members in the scheme.

In 2008, a 12-month grace period was introduced to the third situation to limit the amount of unnecessary liability repayments, particularly by multi-employer schemes.

The Department for Work and Pensions will imminently launch another review of this requirement, after saying last September “there may be a merit in allowing further flexibility” to the law.

It is considering extending periods of grace for employers and the nature of a qualifying insolvency event to prevent unnecessary triggers of the debt payment.

This would allow employers a longer time to employ people as active members of the scheme without triggering a section 75 debt under the third category above, avoiding a potentially costly exercise for the scheme to pursue a portion of the debt which may not be recoverable or worth recovering.

Pensions minister Steve Webb said: “The point of the whole exercise is securing people’s pensions.

“If something technical changes but nothing real changes, that’s where we would like to have more flexibility, so that is the clue.”

The minister questioned the impact on small organisations, such as churches, of the automatic wind-up of the scheme and debt pay-off a year after the last active member leaves.

“Is that akin to an insolvency event?" he asked. "We are looking at grace periods and whether actually a year is the right answer.”

Jane Samsworth, head of pensions at Hogan Lovells, welcomed the idea of more flexible grace periods, but urged schemes to be vigilant in monitoring employers during this period.

“The trustees will have to primarily make sure that the employer is or is about to employ more employees.”

Schemes should then request copies of the contract to satisfy themselves the section 75 debt trigger has been avoided.

Piecing it together

The situation can become more complicated for schemes in the event of insolvency.

Mark Howard, a partner at Barlow, Lyde & Gilbert, said trustees need to be active in making sure other creditors are not paid out in advance of the scheme.

“It is really a matter of protecting their position,” he said. “It is a matter of reminding the employer that they are a creditor and they should be consulted over any distributions above and beyond secured creditors.”

Schemes should consider pressing the sponsor, in writing, to appoint an insolvency practitioner, to make themselves more comfortable the correct process will be followed.

They should also consider any leverage they have over the employer, such as demands for contributions, to encourage them to appoint an administrator.

There can be cases when schemes discover the section 75 obligation may have been triggered in the past, and need to establish relevant facts around whether or not it was.

"Another big question is whether scheme records identify which members come from which company,” Howard added.

This can be messy if a company has a history including mergers and other subsidiary relationships.

There are a few key steps for schemes who think there may have been a section 75 breach to explore further, said Samsworth:

1. Find out who is the statutory employer. This is not always the same as the sponsor, but the entity which has employed active members;

2. For those statutory employers who have past ceased to participate, is there a section 75 debt due? Have they paid it?

3. Decide whether the size of the debt is worth the cost of pursuing it. Schemes can decide to put in place an appointment arrangement to relieve a past employer of their debt, and spread it among the remaining employers.