Where a participating employer departs from a multi-employer defined benefit scheme with active members, in terms of Section 75 Pensions Act 1995 and the Occupational Pension Scheme (Employer Debt) Regulations 2005 (the "Employer Debt Regulations"), an employment-cessation event will normally occur. This is because the departing employer will cease to employ active members in circumstances where remaining employers continue to employ active members.
Where the assets of the scheme are less than its liabilities calculated on a buy-out basis, the occurrence of an employment-cessation event triggers an obligation on a departing employer to pay a Section 75 debt to a scheme's trustees.
The legislation currently permits Section 75 debts to be modified where they are triggered (through either a "Scheme Apportionment Arrangement", a "Withdrawal Arrangement" or an "Approved Withdrawal Arrangement") and provides exemptions from an employment-cessation event being triggered and a consequential Section 75 debt arising (through easements known as "the de minimis restructuring test" and "the restructuring test"). Many commentators have expressed concerns that neither the existing restructuring exemptions nor scheme apportionment arrangements are sufficiently flexible to address issues raised by corporate restructurings.
To counter that, the DWP proposed amendments to the Employer Debt Regulations through the Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2011 (the "2011 Regulations") to introduce a new Flexible Apportionment Arrangement ("FAA") option. This has been designed to provide greater flexibility for employers considering corporate restructurings. The DWP recently announced that the provisions which were due to come into force in October 2011 have been postponed until December 2011 - using its "one-in, one-out" regulation strategy as its reason. We shall leave it to you to suggest which other burdensome regulations could be repealed!
Under a FAA, scheme liabilities would be reapportioned to one or more of employers remaining in a pension scheme. Another continuing employer in the scheme may be able to take the place - or "step into the shoes" of an employer who is no longer participating, with the Section 75 debt being triggered on the continuing employer's cessation. The debt would be calculated by reference to the liabilities of both the continuing employer's members in the scheme plus those members who had been employed by the previous employer.
A FAA option will be subject to a number of additional criteria such as the "funding test" being met and the written consent of the trustees and the parties to the FAA being obtained.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.