Time for action

In any large multi-employer occupational pension scheme, it is not uncommon for one or more of the sponsoring employers to be “dormant”, in the sense that they have stopped the accrual of benefits. Typically, such schemes will be led by a large holding company, which is the principal employer, with a number of smaller participating subsidiaries.

However, proposals to change the debt on employer regulations governing such schemes could saddle employers with an unexpected debt, unless they act now to put their houses in order.

The New Multi Employer Debt Member Regulations will make changes to the way section 75 and 75A of the Pensions Act, as amended, will apply to multi-employer occupational pension schemes. Currently, a section 75 debt arises only when participating employers leave the scheme, or the scheme is wound-up. Under the draft regulations, employers which have been dormant for at least 12 months would automatically trigger a section 75 debt, irrespective of whether they leave the pension scheme. So, simply by doing nothing, participating employers could be in for a major shock.

At the moment, when a company leaves the scheme, the section 75 debt is calculated on the basis of the cost of securing liabilities using annuities, through an insurance company or alternative providers. Furthermore, most scheme rules do not have an express apportionment rule, allowing for any debt of a participating employer to be reapportioned to principal employer, if this is what the parties want. The new regulations may override the rules in allowing a reapportionment of liability, but there is no guarantee of this. It therefore seems sensible, in any event, for employers to include in the scheme rules an express power to reapportion liabilities, subject to the consent of the relevant parties.

Taking the next step
The next step for a number of employers would be to further amend their rules to apportion liabilities to the principal employer – which is normally the holding company, if that is the strongest financial company – and, immediately following that, leave the scheme as quickly as possible. Because the liability has been apportioned to the holding company, which remains in the scheme, there would be no liability crystallised under section 75 and 75A of the Pensions Act 1995 and Regulation 7 of the Occupational Pension Schemes (Employer Debt) Regulations 2005.

Under the existing system, it is possible for the parties to enter into something known as a “withdrawal arrangement”, provided this is approved by The Pensions Regulator. A withdrawal arrangement is agreed between the exiting employer, a guarantor – typically other participants in the scheme – and the trustees, under which the former is permitted to pay a reduced amount upon leaving the scheme.

The difficulty with a withdrawal arrangement is that it is not open to parties on a corporate transaction where there were sufficient funds from the sale of the participating company to meet the section 75 debt. The Pensions Regulator would not approve the withdrawal arrangement in these circumstances.

So, where a section 75 debt is currently triggered by an active move to withdraw, which employers can mitigate with appropriate preparation, the new regulations take a far tougher stance, by automatically triggering a debt against dormant employers after 12 months of inaction. This is the main difference in principle and is most likely to catch out sponsoring employers which have not, historically, felt there was any reason to tackle the issue of dormancy.

Perhaps wary of previous unpleasant surprises from the department of work and pensions, many employers are choosing to bite the bullet and make their arrangements ahead of the rule change. After all, any additional last-minute amendments to the draft, preventing a reapportionment of liability, would make a section 75 debt considerably more difficult to avoid.

Gary Cullen is head of the pensions law team at UK-based law firm, Maclay Murray & Spens