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Deferred debt arrangements: a missed opportunity?

14 May 18

Pensions briefing: new regulations offer some relief to employers facing debts due to the rules applying to multi-employer pension schemes, but the conditions attached may limit their usefulness

by Colin Greig

Over a year ago (“Trapped employers – relief any time soon?” Journal, November 2016, 34), I highlighted the call made on the UK Government to come forward with proposals to reduce the burdens on employers facing debts triggered by the rules of multi-employer defined benefit pension schemes. In April 2017 the Government published for consultation the draft Occupational Pension Schemes (Employer Debt) (Amendment) Regulations 2017. From that consultation the Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2018 emerged in February 2018 and came into force on 6 April 2018.

Deferred debt arrangements

The 2018 Regulations make various amendments to the employer debt regime. In particular, they introduce a new option for employers managing s 75 debt (triggered when an employer no longer employs active scheme members, but one or more others still do), namely the deferred debt arrangement (DDA), permitting employers in specified circumstances to defer payment of such debt, provided the trustees or scheme managers are satisfied certain conditions are met and consent in writing.

The Government’s intention is that the DDA will enable employers whose only change in circumstances is that they are ceasing to employ an active scheme member to retain an ongoing commitment to the scheme and defer payment of s 75 debt, subject to certain conditions being met. 

Conditions

Those conditions include:

  • the scheme not being in a Pension Protection Fund (“PPF”) assessment period or being wound up when the DDA takes effect; and
  • the trustees or scheme managers being satisfied: (i) that the scheme is unlikely to enter a PPF assessment period in the 12 months beginning with the date the DDA takes effect; (ii) that the deferred employer’s covenant to the scheme is not likely to weaken materially within that period.

During the period that the DDA is in place, the 2018 Regulations make provisions consistent with the policy intention that the employer should continue to have the same responsibilities to the scheme as if they were still employing an active member.

DDA termination

The circumstances in which the DDA will come to an end are prescribed under the 2018 Regulations and will be the first date on which one of the following occurs:

(a) the deferred employer commences employing a person who is an active member of the scheme;

(b) the deferred employer and the trustees or scheme managers agree that the DDA should come to an end in certain circumstances;

(c) a relevant event occurs in relation to the deferred employer;

(d) all employers in the scheme have experienced a relevant event or have become deferred employers;

(e) the scheme commences winding up;

(f) the deferred employer restructures, unless certain specified circumstances apply;

(g) a freezing event occurs in relation to the scheme;

(h) the trustees or scheme managers serve a notice on the deferred employer stating that the DDA has come to an end on the grounds that they are reasonably satisfied that: (i) the deferred employer has failed to comply materially with its duties under the Scheme Funding Regulations; (ii) the deferred employer’s covenant with the scheme is likely to weaken materially within the next 12 months; or (iii) the deferred employer has failed to comply materially with its duties under reg 6 (duty to disclose information) of the Occupational Pension Schemes (Scheme Administration) Regulations 1996.

Whilst the Government’s consultation response highlights that it reconsidered and reduced the number of conditions to be met in order that an employer could enter into a DDA, and the circumstances that the DDA could come to an end, it remains to be seen whether the DDA will be much used in light of the requirements of the remaining conditions and the ability of the trustees or managers of a scheme to terminate the DDA by serving notice in certain circumstances.

Comment

The DDA option may provide some relief to a limited number of employers, but in limited circumstances and subject to meeting certain conditions (satisfaction of which will result in additional cost). Use and effectiveness of the option will be limited and constrained accordingly.

It is perhaps surprising that the simpler option of amending the multi-employer debt provisions – so that ceasing to employ active members does not trigger employer debt – was not preferred. The latter option would lead to a treatment of such employers consistent with that which applies currently in multi-employer schemes where at the point of cessation no other employer employs active members, and single employer schemes. Legislation is already in place to prevent employers abandoning, seeking to abandon or avoiding liabilities in those types of schemes.

Colin Greig, partner, Pensions, DWF LLP

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