September 26
Deferring your pensions debt

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Can we expect the introduction of a new “deferred debt arrangement” shortly, sitting alongside the existing apportionment and withdrawal arrangements available to employers who cease to participate in multi-employer defined benefit pension schemes?

In April 2017 the Department for Work & Pensions issued draft amendments to the Employer Debt Regulations that set out how such a deferred debt arrangement might work.  This option would allow employers participating in a multi-employer scheme to defer the requirement to pay an employer debt (the Section 75 debt or buy-out deficit) following an employment-cessation event.  An employment-cessation event occurs when an employer in a multi-employer scheme ceases to employ any active members whilst at least one other (non defined contribution) employer participating in the scheme continues to employ an active member.

The short consultation closed on 18 May 2017 with an intended date for these new regulations to come into force of 1 October 2017.  It is expected that such an arrangement would be particularly beneficial to employers in non-associated multi-employer schemes who have not been able to take advantage of the flexibilities in the apportionment and withdrawal arrangements introduced in 2008 and subsequently in 2011.

The following conditions will need to be met in order for a deferred debt arrangement to be implemented:

·         the ‘funding test’ must be satisfied.  This test is already used within some of the existing apportionment and withdrawal arrangements and requires the trustees to be satisfied that the remaining employers are reasonably likely to be able to fund the scheme so that it will have sufficient and appropriate assets to meet its technical provisions and that the arrangement will not adversely affect the security of members’ benefits;
·         the scheme is not in a PPF assessment period or being wound up;
·         the trustees are satisfied that a PPF assessment period is not likely to begin in the 12 months after the effective date of the proposed deferred debt arrangement; and
·         the trustees have given their written consent to the arrangement.
Whilst the deferred debt arrangement is in place the deferred employer retains all of its existing responsibilities to the scheme including with respect to scheme funding.  Therefore, the deferred employer will still be required to make appropriate deficit reduction contributions to the scheme.
We are currently waiting to see whether the draft regulations are finalised following the responses to the consultation and whether the Pensions Regulator will issue guidance in this area although it is possible that the initial timescales indicated may have slipped due to other matters taking priority.
One final point to note on the draft regulations is that it will potentially be the first time that the term “covenant” is used in legislation.  The Pensions Regulator defines the covenant as “the extent of the employer’s legal obligation and financial ability to support the scheme now and in the future” and the term may need to be legally defined if it is used within these amending regulations.  Watch this space!

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