DWP consults on new statutory debt deferral mechanism

DWP is consulting on draft amending regulations which would introduce a mechanism for deferring employer debts in multi-employer pension schemes.

The proposed amendments to the Occupational Pension Schemes (Employer Debt) Regulations 2005 will be welcomed by employers in multi-employer schemes, particularly those who would struggle to avail themselves of any of the existing mechanisms for managing employer debts. 

The deferred debt arrangement
A deferred debt arrangement is being introduced in response to a 2015 Call for Evidence which found that employers in non-associated multi-employer pension schemes were often not able to make use of existing arrangements to manage an employer debt when they cease to employ active members. 

The deferred debt arrangement:

• would give employers in multi-employer schemes the option to defer the requirement to pay an employer debt on ceasing to employ an active member, and
• would be subject to a condition that the employer retains all their previous responsibilities to the scheme and continues to be treated as if they were the employer in relation to that scheme.

The new arrangement would be subject to the written consent of the trustees and meeting the statutory funding test.  The arrangement would not be open to employers who are restructuring but would be available to those who are already in a period of grace arrangement.

There are a number of circumstances in which a deferred debt arrangement may come to an end and an employer debt could become due including:

• an insolvency event occurs in relation to the deferred employer, 
• the scheme winds up,
• a freezing event occurs in relation to the scheme, 
• the trustees determine that the deferred employer has failed to comply with their obligations under the scheme funding regulations, and
• the employer in a deferred debt arrangement employs an active member (although no debt would trigger in this scenario).

At first glimpse, this new mechanism could be a potential life line for those employers who fear the consequence of an employer debt being triggered when their last active member retires.  For example, small employers including charities which participate in large non-associated multi-employer schemes.  However, there are a few limitations which should be noted:

• the mechanism only defers the employer debt.  When the deferred debt arrangement ends, a debt will become due from the employer.  In some cases, the employer may have little or no control over the circumstances in which the arrangement is brought to an end and the debt triggered.
• the employer debt is calculated by reference to the date on which the deferred debt arrangement ends.  Depending on the experience of the scheme over the intervening period of deferment, the employer debt could be more than the debt calculated at the time of the employment-cessation event.  An employer that enters into a deferred debt arrangement, therefore, takes a gamble that the funding position of the scheme will improve over time.  In a last man standing scheme, for example, the insolvency of one or more employers during the period of deferment could increase the remaining employers' share of the orphan liabilities and their employer debt. 
• the deferred debt arrangement is intended to help employers in non-associated multi-employer schemes to manage their employer debts (although note that the arrangement is available to all open multi-employer schemes).  However, the arrangement is subject to the consent of the trustees.  Our experience of some of the larger non-associated multi-employer schemes is that, where an employment-cessation event occurs, the trustees will seek to recover the resulting employer debt whatever the cost to the individual employer.  This raises the question whether the mechanism will be used in the schemes and for the benefit of the employers that it is intended to help?

The consultation closes on Thursday 18 May 2017.