Industry seeks remedy for multi-employer s75 headache

In March, the Department for Work and Pensions called for evidence on s75 debt obligations for non-associated employers in multi-employer pension schemes.

Under the current regulatory regime, the loss of an employer’s last active member triggers a debt – calculated on a buyout basis – presenting many employers with an unaffordable debt.

The consultation collated views from industry stakeholders after concerns were raised about the affordability of the s75 trigger.

Responding to the DWP’s call for evidence this week, the National Association of Pension Funds published an analysis of three potential amendments to current employer debt regulations:

• Allow more flexibility around the timing of debt repayment;

• Remove the active-cessation trigger on the departure of an employer’s last active member;

• Value the debt on a different basis but still require rapid repayment of debt.

NAPF members concluded the departure of an employer’s last active member should trigger a debt on the technical provisions of the scheme rather than on the basis of a full buyout debt calculated on the cost of purchasing annuities.

In its response, the NAPF said: “On balance, the approach whereby an employer, upon losing its last active member, becomes immediately liable for its debt calculated on a technical provision basis rather than a buyout basis appears to best satisfy our criteria for a reasonable accommodation of reasonable employer complaints.”

Is technical provisions too expensive a price tag to actually be viable for some employers?… Paying any debt up front really puts [sustainable growth] under pressure

Patrick Bloomfield, Hymans Robertson

However Patrick Bloomfield, partner and scheme actuary at consultancy Hymans Robertson, said debt calculated on a technical provisions basis would still be unaffordable for many employers.

“Is technical provisions too expensive a price tag to actually be viable for some employers?” he said, adding: "Paying any debt upfront really puts [sustainable growth] under pressure."

Hymans Robertson’s response to the DWP, also released this week, called for the removal of active-cessation triggers across all multi-employer schemes.

"The option we've put forward is that cessation of accrual doesn’t trigger any debt, which is the same as you have with a single employer,” Bloomfield said.

He said employers would continue to pay deficit contributions, be liable for the scheme’s funding and investment risks, and would only be able to walk away from their obligations with full payment of the s75 debt.

"Sponsors still legally obliged to fund a scheme remain interested in seeing that they meet that obligation properly," Bloomfield added. 

Practical solutions

Lesley Browning, partner at law firm Norton Rose Fulbright, said calculating employer debt on a technical provisions basis presented a “halfway house” but would not be to the benefit of all participating employers.

“I really do think this is quite an intractable problem,” said Browning. “Any solution of not paying the full amount or paying the full amount in stages is potentially detrimental to employers participating in the scheme.”

Kirsty Bartlett, partner at law firm Squire Patton Boggs, said any retraction of employers’ obligation to pay the debt should be tempered with adequate safeguards to protect the security of members’ benefits.

“The NAPF proposal that employers who do not pay the full buyout debt don’t get their statutory discharge would mean there is still a mechanism for the trustee to get further contributions from them in the future,” said Bartlett.

“That could well prove to be a helpful and practical suggestion,” she said.