A New Way of Dealing With Pensions Risk

Around this time last year, the Government issued a consultation on the operation of the statutory employer debt regime, and in particular looking at issues on how it operates for non-associated employers (such as charities) in multi-employer defined benefits schemes. The current regime can operate to cause huge liabilities to fall due – the “Section 75 Debt” – when an employer runs out of employees accruing benefits in the scheme. The Section 75 Debt is calculated as if the scheme was winding up and annuities being bought with an insurer to meet the employer’s share of the liabilities. So the risk of triggering this liability may depend on the actions of a very small number of employees who are still active members of the defined benefits scheme (it being typical for employers to offer new joiners defined contribution scheme).

The outcome of the consultation was published in February 2018 and new regulations came into force on 6 April 2018 which will put in place a potential life line for employers in these circumstances. On running out of active members in the scheme, a new option will be available called a Deferred Debt Arrangement (“DDA”). Some modifications to the scope of a DDA have been made in the consultation response, but it will operate to postpone (possibly indefinitely) the requirement to pay the Section 75 Debt. Instead, the employer will continue to be treated by the scheme trustees as if it employed active members and its funding obligations towards the scheme will be determined accordingly. This simply means that regular employer contributions to fund the scheme’s deficit will still be required.

Entry into a DDA is not automatic; there are hurdles to overcome and the agreement of the scheme trustees will be needed (not least due to their duty to act in the best interests overall of the scheme members and beneficiaries). As a change made following the consultation, a condition for agreement of a DDA will be that the scheme trustees are satisfied that the employer’s covenant (i.e. financial strength) is not likely to weaken materially within the next 12 months. This means that scheme trustees may call for financial information and forecasts from the employer in order to reach a decision on this point, and possibly could commission external advice.

And a DDA can come to an end. Examples of when this would happen include the employer admitting a new active member into the scheme, accrual ceasing for all employers in the scheme, or by agreement with the trustees or on the insolvency of the employer. However, care needs to be taken as in some circumstances the bringing to an end of the DDA will re-trigger the Section 75 Debt.

Anne-Marie Winton, Partner, ARC Pensions Law

ARC Pensions Law LLP is a national firm of specialist pensions lawyers founded in 2015 to assist employers and trustees of workplace pension schemes. It works with lawyers and other advisers in a wide range of associated disciplines to provide pragmatic advice in the most cost-effective way.

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