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Easing the debt block

20 February 12

Corporate restructurings that involve underfunded defined benefit pension schemes may now benefit from a new facility called a "flexible apportionment agreement"

by Colin Greig

From 27 January 2012, corporate restructurings that involve underfunded defined benefit pension schemes may benefit from a new facility called a “Flexible Apportionment Agreement” (the “FAA”).

The FAA is the DWP’s response to continuing concerns that statutory employer debt provisions were impeding corporate transactions. The employer debt provisions are intended to provide protection to members of defined benefit pension schemes when an employer ceases to participate in them. For those purposes, employer debt is broadly the amount the employer must pay into the scheme when it ceases to participate at a time when there is a shortfall between the scheme’s assets and liabilities, calculated on the buyout basis. The employer debt calculated on that basis can be considerable.

Since April 2008, employers have been able to use various statutory options to defer or restructure payment of the debt that would otherwise arise, including:

  • scheme apportionment arrangements, which broadly involve some or all of the departing employer’s debt being reapportioned to other participating players;
  • regulated apportionment arrangements, which are similar to scheme apportionment arrangements but where the trustees consider that there is a reasonable likelihood of the scheme entering a Pensions Protection Fund assessment period or it is already in one. Pensions Regulator approval and non-objection by the board of the Pensions Protection Fund is required;
  • withdrawal arrangements, which broadly involve the departing employer paying a lower amount, at least equal to its share of any deficit calculated on an ongoing funding basis, and where a contingent guarantor stands behind the remaining debt; and
  • approved withdrawal arrangements, which are broadly similar to withdrawal arrangements, but Pension Regulator approval is required; they apply when the proposed immediate payment is less than the employer’s share of the deficit calculated on an ongoing funding basis.

New flexibility

Easements had been introduced in April 2010 to address concerns that notwithstanding these statutory options, the employer debt regime was hindering corporate activity. Certain extensions were introduced at that time (“general easement” and “de minimis easement”), and the FAA is the DWP’s latest response to calls for further flexibility in the employer debt regime.

The FAA affords an alternative to an employer debt actually being triggered in a relevant multi-employer defined benefit scheme on certain types of corporate restructuring.

The new arrangement apportions liabilities, rather than a fixed sum of debt, as is the case under the statutory options available since April 2008, and works by apportioning the departing employer’s liabilities to one or more remaining employers who, in effect, step into its shoes as regards these. The debt under legislation would only be triggered if triggered in a relevant multi-employer defined benefit scheme on the employer to whom the liabilities have been transferred, at which point such employer would be liable for a debt calculated on the basis of its own liabilities plus those for which it had agreed to accept responsibility under the FAA.

The new arrangement must be in writing and must be agreed by the trustees and all employers involved. All liabilities of the departing employer must be apportioned to employers remaining within the scheme. A funding test must also be met; this aims to ensure that the remaining employers are able to fund the scheme adequately and that the arrangement will not adversely affect members’ benefits.

Whilst a step in the right direction, it is disappointing that the DWP did not also provide further clarification (as called for by many participants in its consultation) on the operation of several aspects of the employer debt regime. Whilst employers should not be in a position to walk away from pension liabilities without making appropriate arrangements, it is questionable whether the DWP has yet achieved a satisfactory balance between restructuring easements and protection of members.

Colin Greig, Partner, Pensions, Biggart Baillie LLP

 

 

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