12th October 2017 How deferred debt arrangements offer easement for NAME schemes
Nights start to close in in October and we can look forward to evenings at home trying to find old pound coins down the back of the sofa in time to spend them.
Also expected in October were the new Employer Debt Amendment Regulations 2017, following consultation between April and May 2017. But it seems likely that these will not now appear until next year.
In fact the Department for Work and Pensions (DWP) hasn’t met the usual timeframe for issuing its response within 12 weeks of the consultation closing. The consequences of this delay may be particularly acute for employers in non-associated multi-employer (NAME) schemes as the amendment regulations will, subject to the outcome of the consultation, put in place a new Section 75 (s75) easement called a deferred debt arrangement (DDA).
In 2015 the DWP issued a call for evidence in relation to the operation of the section 75 employer debt regime, noting that for some employers “rather than protecting the interests of members, stakeholders argue that the arrangement and liabilities may risk driving some employers out of business unnecessarily”. The purpose of gathering evidence was to seek views about managing employer debts in NAME schemes where the participating employers are typically commercially unrelated and often competitors.
The charity sector has been measured as particularly vulnerable. In 2013, the Charity Commission warned charities with defined benefits schemes that the public disclosure of the associated accounting liability “can influence the stance taken by those parties with whom a sponsoring charity transacts” and raised questions about how the reserves policy will be affected. And in 2014 the Charity Commission followed up on this warning in an accounts monitoring report, and on sampling 97 charities from 740 identified with pension scheme deficits, the majority of charities sampled were employers in NAME schemes.
The reality for any employers in a NAME scheme is that their existence (or otherwise) can depend on the actions of a very small number of current employees who are still active members. Employee departure, retirement or redundancy could all trigger an unaffordable s75 debt and also trigger the employer’s insolvency (which necessarily also adds to the orphan liability burden on the remaining NAME scheme employers).
Existing legislation offers some solutions – but these do not necessarily make sense in the context of NAME schemes. For example, under a scheme or flexible apportionment arrangement, the trustees can agree to the contingent liability for employer A’s s75 debt being passed (without falling due for immediate payment) on that employer running out of active members to employer B and/or employer C – but why would those employers agree to accept this liability if not associated with employer A?
The new easement under the consultation is a method to defer the requirement to pay a s75 debt in full immediately on it falling due. This DDA would be subject to employer A still continuing to pay contributions into the scheme to meet its share of the ongoing deficit under the valuation. And it is proposed that a pre-condition of agreement of a DDA is that the trustees are comfortable that employer A is sufficiently financially strong to be allowed to pay off its share of the pensions liabilities over time, rather than immediately, on running out of active members. If a participating employer has already used a period of grace notice concession, it will be allowed to convert this to a DDA.
It is proposed that options will exist to end a DDA, including if the employer becomes insolvent, or defaults on its payments into the scheme or if its covenant to the scheme is likely to weaken within the next 12 months (and how to test this is not set out in the draft regulations). In these circumstances the s75 debt becomes payable.
Anne-Marie Winton, Partner
This article was published in Professional Pensions
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