In a UK multi-employer pension plan, when a participating employer ceases to participate in the plan at a time when one or more of the other employers continue to participate (which in this context means continuing to employ active members who are accruing benefits under the plan), it triggers the departing employer's Section 75 Debt. This commonly occurs when an employer is sold but the pension plan and the other plan employers remain behind with the seller. The Section 75 Debt, referring to Section 75 of the Pensions Act 1995, will, unless alternative arrangements are put in place, be the departing employer's share of the plan's deficit, calculated on the full buy-out/insolvency basis. The buy-out deficit is calculated by determining the level of funding required for all the plan benefits to be bought out immediately with an insurance company. As this allows no opportunity for future contributions from the employer or investment return, the buy-out deficit is often significantly higher than the ongoing or accounting deficit of the plan. This can be a significant issue in corporate restructurings or disposals.
There were originally four permitted alternative arrangements (a scheme apportionment arrangement (SAA), a regulated apportionment arrangement, a withdrawal arrangement and an approved withdrawal arrangement), which allow the trustees and the employers to agree that the departing employer's Section 75 Debt will be less than its share of the buy-out deficit. New Regulations, which came into force on January 27, 2012, introduced another alternative, the flexible apportionment arrangement (FAA). The FAA, based on the existing SAA, permits the apportionment of all the liabilities (actual and contingent) of the departing employer to another employer or employers that remain in the plan. Unlike under an SAA, no Section 75 Debt will technically be triggered, but the departing employer will still be discharged from all liabilities to the plan. The FAA, in common with the SAA, requires the agreement of the trustees, the departing employer, and any employer to whom the departing employer's liabilities are apportioned. In addition, the trustees will still need to be satisfied that the "funding test" is met (i.e., that the remaining employers are likely to be able to fund the plan and that members' benefits will not be adversely affected).
The main benefit of an FAA appears to be that it is clear all of the departing employer's pension liabilities can be apportioned to other employers, not just the Section 75 Debt itself. There is also no need to actually calculate the Section 75 Debt. In addition, if a number of employers cease to participate in the same timeframe, the trustees will be able to assess the funding test only once in respect of all employers. It is likely that due to these benefits in future in situations where an SAA would previously have been used, an FAA will be used instead. This additional flexibility is helpful, but could perhaps more simply have been achieved by amending the existing SAA regime. As with the previous regime, agreement of the trustees is key and if they have concerns about the funding position of the plan, it may be that additional contributions or other support arrangements such as guarantees are required to obtain their consent. The employers will also need to consider whether it is appropriate to seek clearance from the Pensions Regulator for the FAA.
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