Call for evidence: employer debts and non-associated employers

7 minute read
14 May 2015

Common examples are industry wide schemes, such as the Universities' Superannuation Scheme, the Pilots National Pension Fund and the Social Housing Pension Scheme. The DWP wants to know whether it should change the existing legislation so that it is easier for employers participating in such schemes to seek to rationalise their pensions costs.

We are preparing a response to the call for evidence. Please let us know if you have any views on the consultation which you would like us to feed back on your behalf.

While the consultation is ostensibly focussed on how the employer debt regime works in the context of non-associated multi-employer schemes, many of the questions raised in the call for evidence are equally applicable to associated multi-employer schemes.

If you have any views on the way the employer debt legislation works, including how effective (or otherwise) you find the existing employer easements, we welcome your input. The deadline for responses is 22 May 2015.

More detail

The DWP is considering whether the existing employer debt regime should be changed so that flexibilities are introduced for employers who cease to employ active members of a non-associated multi-employer pension scheme. This is in response to concerns that the existing legislation is too onerous for employers who are seeking to rationalise their pension costs.

It is clear from the call for evidence that there is some tension inherent in this question.

On the one hand, the DWP's policy intention is that the existing employer debt regime remains in place to protect schemes, and therefore scheme members. This is particularly important in the context of a multi-employer scheme where non-associated employers participate alongside each other even where they might compete commercially, and are required under the existing regime to pick up the cost of other employers' liabilities (for example, if they walk away from the scheme).

On the other hand, the DWP is seeking to address the concerns of some employers that the existing employer debt regime does not strike an appropriate balance between the needs of the scheme and those of the employer; that the current impact of the legislation is to potentially drive smaller and less financially robust employers out of business unnecessarily.

What is the DWP asking? How can you help?

The DWP's call for evidence is focussed on three main areas: (1) the existing easements available to employers; (2) the introduction of specific easements; and (3) views on other possible approaches. It is asking for thoughts from stakeholders on all of these. The Wragge Lawrence Graham & Co Pensions team is preparing its response to the consultation, and we welcome your views.

1. Do the existing easements work sufficiently well in helping employers to manage employer debt?

Previous changes to the law have already introduced some flexibilities for employers who are seeking to manage their debts in relation to a multi-employer pension scheme. The most commonly used of these are:

  1. Withdrawal arrangement - where, once a debt has been triggered, the exiting employer pays an amount to the scheme based on scheme funding levels (the amount needed to ensure that the scheme meets its liabilities on a technical provisions basis), but a guarantor (usually a related company) agrees to pay the balance to buy-out level;
  2. Approved withdrawal arrangement - where, once a debt has been triggered, the exiting employer pays an amount to the scheme but lower than scheme funding levels. A guarantor (again, usually a related company) agrees to pay the balance to buy-out level. Approval is required from the Pensions Regulator.
  3. Period of grace - where an employer who has ceased to employ any active members of a multi-employer scheme gives notice to the trustee that it intends to employ an active member within the next 12 months (can be extended to 36 months with trustee agreement), essentially allowing the employer to freeze its debt obligations during the period of grace; and
  4. Apportionment arrangement - where an employer apportions its debt in relation to a multi-employer scheme to another (usually associated) participating employer.

The DWP wants to know how well these easements work in practice, for both employers and for schemes. It has asked for comments on any weaknesses or problems with the easements, and whether they could be made more user friendly. Do you have any views on this?

2. Other suggested easements

The DWP also wants to look at other possible easements.

Easements already suggested to the DWP include:

  • Introducing more flexibility around debt repayment - for example, allowing exiting employers from a multi-employer scheme to negotiate a long term debt repayment plan with the trustees in order to avoid an up-front debt;
  • Amending the legislation so that ceasing to employ active members does not trigger an employer debt - which would broadly have the effect of placing the employer participating in a multi-employer scheme in the same position as it would be for a single-employer scheme. That is, no employer debt would be triggered immediately but would be in the event of the employer's insolvency, or wind up of the scheme.
  • Changing the way the employer's liability is calculated following an employment-cessation event - by, for example, calculating the debt on a technical provisions basis (rather than buy-out basis) where that employer can be shown to have a strong employer covenant.

More detail on all of these possible changes, including possible pros and cons of each, are contained in the consultation document.

The DWP is also welcoming suggestions for other approaches which might be used to improve the employer debt regime.

If you would like us to take your views into account in our response to the DWP's call for evidence, please let us know, either through your usual Wragge Lawrence Graham Pensions team contact, or by contacting Liz Wood.

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