The Department for Work and Pensions (DWP) has launched a consultation on proposed amendments to employer debt legislation for employers in non-segregated defined benefit (DB) multi-employer pension schemes.
The consultation, which launched on 21 April, seeks views on the draft The Occupation Pensions Schemes (Employer Debt) (Amendment) Regulations 2017.
The regulations would enable employers in multi-employer schemes to defer the requirement to pay an employer debt on ceasing to employ an active pension scheme member. The deferred debt arrangement would still require the employer to retain all their previous responsibilities to the scheme, and they would continue to be treated as if they were an employer in relation to the scheme.
Employer debt is the amount an employer must pay into the pension scheme when it ceases to participate at a time when there is a shortfall between the scheme’s assets and liabilities. This amount is calculated by referencing the cost of buying out members’ benefits with an insurance organisation.
The proposed deferred debt arrangement, which would sit alongside existing options to manage employer debt, would be subject to certain conditions. This includes a funding test to ensure that the scheme would continue to be sufficiently funded, and that trustees or pension scheme managers provide written consent to the arrangement on the basis that it will not be detrimental to the scheme or its members.
In addition, the scheme must not be in a Pension Protection Fund (PPF) assessment period or likely to be so in the next 12 months. Employers that are restructuring will not be eligible. However, employers that are already in a period of grace arrangement could still utilise the deferred debt arrangement.
The consultation will also explore provisions to address situations where two successive employment-cessation events occur in respect of the same employer, and look at changes to existing options that are already in place to help employers manage an employer debt.
The proposed deferred debt arrangement follows a call for evidence on Section 75 employer debt in non-associated multi-employer DB pensions schemes, which was published in March 2015.
The consultation seeks views from pension industry bodies and professionals, trustees or scheme managers, pension scheme members and beneficiaries, as well as employers and representative organisations.
The consultation will remain open to responses until 18 May 2017.
Chris Hawley, associate at Barnett Waddingham, said: “We are happy government has recognised there are issues here, and welcome any additional flexibility for employers to manage pension debts in ‘business as usual’ situations, where the solvency of the employer is not in question.
“On the face of it this seems like a helpful easement for employers looking to manage the increasing cost of defined benefit pension accrual and the eventual wind down of their schemes. Although in reality many employers may be able to achieve a similar result within the guidelines of the current debt regulations.
“However, it is concerning that under this proposal trustees would be given the power to trigger a substantial cash payment down the line, representing a loss of control to the employer. The proposed test, if trustees deem it likely that the covenant will weaken in the next 12 months, is not tightly defined. For example, how many trustees would call in the debt amidst the uncertainty being created by Brexit?
“If government does not re-consider this particular trigger, employers may instead decide to keep employing active members to avoid giving trustees what would be in effect a very strong negotiating stick.
“Regardless of whether the changes proceed, employers need to carefully consider what their obligations are and how those obligations may change over time. Monitoring can help employers looking to exit non-associated multi-employer schemes (NAMES) spot opportunities to do so at an affordable time.”