How to avoid paying section 75 debt

As of today (January 27), employers that leave multi-employer schemes are able to do so while avoiding paying section 75 (s75) debt, following a change in legislation.

This new flexible apportionment arrangement (FAA) will help employers as their liabilities can be shared out among other sponsors without calculating the s75 debt due to the scheme.

The FAA will also create flexibility for corporate restructuring.

Instead of calculating the debt due from the exiting employer, the liabilities will be shared out to the other participating sponsor in the scheme, which is a more attractive solution for companies.

But schemes considering making such a move must ensure members’ benefits are not adversely affected and there is agreement from the trustees, departing employer, remaining employers and the Pensions Regulator.

How can I arrange an FAA?

In order to take advantage of an FAA the following conditions must be met:

• The two-tier funding test must be met. First, the receiving employer must be able to fund the scheme and, second, no arrangement can be made that would adversely affect members' benefits.

• All pension liabilities must be shared out to employers participating in the scheme.

• The trustees of the scheme, as well as the leaving and remaining employers, must give written consent to the FAA.

• The scheme must not be in a Pension Protection Fund (PPF) assessment period and the trustees must be satisfied that one is unlikely to begin within a 12-month period.

• The leaving employer cannot be in a 'period of grace'. This is where it has ceased to employ active members but intends to do so within the next 12 months and the trustees are given notice.

The allocation of liabilities must be to a participating employer, which may not include the group company with the strongest covenant.

As with a scheme apportionment arrangement, schemes must notify the regulator of an FAA.

Section 75 overview

When an employer leaves an ongoing underfunded multi-employer defined benefit scheme, a debt will become due under sections 75 of the Pensions Act 1995. This is known colloquially as the s75 debt.

An employer is deemed to depart from the scheme when the following happens:

• It ceases to employ at least one active member when another employer continues to employ at least one active member. This is called an employment cessation event; 

• It gives notice of an employment cessation event to the trustees of a frozen scheme;

• An insolvency event occurs;

• The scheme begins winding up.

Sidestepping the cost

There are alternatives available to an employer that would allow them to avoid or modify their s75 debt.

The default position is that the departing employer will pay its share of the full buyout debt

Under the employer debt regime there are two easements which allow an employer to depart without becoming liable to pay a s75 debt. These are the de minimis and restructuring easements.

The de minimis easement applies to small-scale transactions where particular conditions are met.

For example, the easement stipulates there be a maximum number of members affected by the departure of the employer and the employees' total accrued annual pension must not exceed a particular amount.

The restructuring easement may assist schemes where there is one departing employer and one receiving employer and it is proven that the receiving employer is as likely to meet the departing employer's liabilities as well as cover its own liabilities.

If an employer departs from a scheme using these easements, it it will not be classed as an employment cessation event and the employer can leave the scheme without a s75 debt triggering.

Otherwise the departing employer will pay its share of the full buyout debt.

Sasha Butterworth is a partner and head of TLT’s pensions team