Experts have welcomed the government’s recent consultation proposing a new deferred debt arrangement for employers in multi-employer pension schemes, but concerns over complexity of employer debt regulation remain.
Under current legislation, when an employer opts out of a multi-employer defined benefit scheme, it is required to pay an exit fee to the trustees if the scheme is underfunded. However, this leaves many employers with a debt they cannot afford.
Mixed responses
Although the Department for Work and Pensions undertook a call for evidence about s75 employer debt in non-associated multi-employer DB schemes, it has been criticised for moving too slowly on the issue.
The consultation doesn’t get away from the fundamental problem, which is that the legislation is flawed
Jane Kola, Arc Pensions Law
The new consultation, published in April this year and set to close on May 18 2017, discusses the main findings of this call for evidence.
It notes that respondents acknowledged that the existing provisions provided protection for members, but “they felt that the current system created what was described as a perverse incentive to continue to accrue unaffordable liabilities”.
However, it also states that a number of the larger schemes and some experts “argued that the current regulations work well in ensuring member protection from any attempted avoidance”.
Deferred debt arrangement
In response to the call for evidence, the government has proposed to introduce a new option for employers in multi-employer schemes to defer the requirement to pay an employer debt on ceasing to employ an active member.
This arrangement would be “subject to a condition that the employer retains all their previous responsibilities to the scheme and continues to be treated as if they were the employer in relation to that scheme”.
But Jane Kola, partner at Arc Pensions Law, was sceptical about the proposals.
“The conclusions of the consultation are sensible for the mischief they are seeking to address, but it doesn’t get away from the fundamental problem, which is that the legislation is flawed, poorly drafted and does not address the real needs of schemes and employers alike,” she said.
Kola added: “Employers should not be able to unfairly escape their liabilities, but they should also not be weakened or driven to insolvency because of promises made decades ago.”
Risks involved
There are a number of conditions to ending a deferred debt arrangement “which make it commercially risky for an employer to enter into”, said Kola.
For example, the employer needs the trustees’ consent to trigger its s75 debt and effectively end its association with the scheme.
“Secondly, there is no logic to the s75 debt for employers who have used the easement being triggered when the scheme becomes frozen,” she added.
Upon freezing, all of the employers remain liable to fund the scheme but with a right to trigger their s75 debt.
“Those who have used the easement would find their s75 debt triggered, potentially with no warning. That could result in insolvency for them whilst the other employers would continue to pay their contributions over the long term,” Kola warned.
It makes sense to come up with a solution, but “the costs and commerciality of the proposals need work if they are to be used to solve the issue they are intended to address”, she added.
Complex and confusing
Stephen Scholefield, partner at law firm Pinsent Masons, noted that “many employers are prepared to stand behind their pension promises over the long term, and it’s good that the government is prepared to update the legislation to allow them to do that”.
Scholefield said the government is trying to strike “a sensible balance” between the interests of the employer and of the scheme members.
Plumbing scheme plans to seek guidance from Scottish courts as government drags feet on s75
Plumbing Pensions’ prolonged consultation with a departing employer over its exit fee has brought to light fundamental problems with section 75 debt legislation as it currently stands for non-associated multi-employer schemes.
“As usual, they do that by giving the trustees the final yes or no as to whether these arrangements should be put in place, and they borrow a lot of the legislation that’s already there,” he added.
But he noted: “It can be difficult in practice – especially when you’ve got an industry-wide scheme with lots of different employers in there.”
Jeremy Goodwin, pensions partner at law firm Eversheds Sutherland, said the consultation is “broadly welcome”, particularly with regard to the deferred debt arrangement, which “follows the well-trodden path of the flexible apportionment arrangement mechanism”.
Nevertheless, Goodwin said that further amendments will make the issue of employer debt even more complex and confusing.
“It is a missed opportunity to take a step back from the detail and decide what employer debt legislation actually makes sense in the current world,” he said.
