After publishing and consulting on draft regulations amending the employer debt regime in the summer/ autumn of 2007, the Department for Work and Pensions ("DWP") laid before Parliament the long-awaited (and much re-drafted) formal amending regulations on 14 March 2008. The amending regulations were not accompanied by an explanation of the changes that have been made to the original draft regulations. It is expected that the amending regulations will come into force on 6 April 2008.

Broadly speaking, a debt calculation is required under the existing regulations where a scheme employer becomes insolvent, a scheme starts to wind-up or (in a multiemployer scheme) where there is an "employment-cessation event". The amending regulations focus primarily on changes to the application of the employer debt regime in multi-employer schemes.

The Key Changes

Definition of "employment-cessation event"

In a departure from the draft regulations, the amending regulations revert to a definition of "employment-cessation event"which is similar to the exisiting regualtions. This means that the concern that cessations of future accrual and scheme mergers could trigger debts has been allayed. However, the DWP has retained the idea of allowing a 12 month period of grace to minimise the risk of "accidental" debts.

Money purchase employers

The amending regulations follow the consultation proposal in closing an anomaly whereby a money purchase employer in a hybrid scheme could theoretically become liable for a share (or all) of the defined benefit deficit in a scheme in which it participated. The clarification is welcome.

Valuation of assets and liabilities

The amending regulations broadly follow the consultation proposal by giving trustees greater control over the value of the assets and of the liabilities to be taken account of in the debt calculation. Where a debt calculation is triggered by an employment-cessation event, trustees will also be free to decide to use an updated asset assessment (after consulting the cessation employer and other scheme employers) and an updated actuarial assessment (after consulting the scheme actuary and the cessation employer).

Approved Withdrawal Arrangements ("AWAs")

The concept of an AWA was introduced to the employer debt regime in September 2005 and is only available where an employment-cessation event has occurred. With an AWA under the existing regulations, a departing employer can, with the agreement of the scheme trustees and the Pensions Regulator, pay something less than the full buyout debt which would ordinarily be payable provided a guarantor exists for the balance of the full buy-out debt and the Pensions Regulator is satisfied that the full buy-out debt is "more likely" to be paid.

The key change under the amending regulations is the removal of the "more likely" test, which proved problematic in practice. The amending regulations also:

  • allow the guaranteed amount to be calculated either as a fixed monetary amount or on a "floating" basis;
  • require the trustees to be "reasonably satisfied" that the remaining employers will be "reasonably likely" to be able to fund the scheme in line with the statutory funding objective.

This seems a sensible alignment with the Pensions Regulator's emphasis on continual monitoring of the employer covenant.

Default apportionment

Under the current regulations, in multi-employer schemes (unless scheme rules provide otherwise) an employer's share of a debt is calculated by reference to the liabilities attributable to employment with that employer, including a proportionate share of "orphan" liabilities. The amending regulations follow a broadly similar approach but avoid some of the worrying drafting proposed in the draft regulations. Accordingly, provided they consult the scheme actuary and the employer in question, where trustees are either unable to allocate a member's liability or can only do so at disproportionate cost, they can now either:

  • attribute the liability entirely to the member's last employer; or
  • attribute the liability in a reasonable manner to any one or more scheme employers (which was an option not covered by the draft regulations)

If trustees cannot do either of the above, the liability will not be attributable to any employer. The introduction of the power to attribute a liability in a reasonable manner is a welcome and pragmatic addition to the regulations which will help to avoid unfair outcomes for short term employers in particular.

New ways of dealing with debts

The amending regulations introduce three new ways of dealing with debts (in addition to AWAs and the default apportionment basis).

Scheme apportionment arrangements

These will replace the existing flexibility for scheme rules to provide for debts to be apportioned otherwise than on the current statutory default basis. The trustees have to be "reasonably satisfied" that the remaining employers will be "reasonably likely" to be able to fund the scheme in line with the statutory funding objective and that the arrangement will not adversely affect the security of members' benefits.

Regulated apportionment arrangements

These will only be available where the trustees believe that the scheme will enter a Pension Protection Fund ("PPF") assessment period within the next 12 months (unless one has already begun) and will require the agreement of both the PPF and the Pensions Regulator.

Withdrawal arrangements

These are simplified AWAs in that the Pension Regulator is not required to approve of their creation. The debt payable by the departing employer will be its proportionate share of the deficit calculated by reference to the scheme's statement of funding principles or, if the scheme has not had its first valuation under Part 3 of the Pensions Act 2004, on a PPF valuation basis. As with an AWA and a scheme apportionment arrangement, the trustees have to be "reasonably satisfied" that the remaining employers will be "reasonably likely" to be able to fund the scheme in line with the statutory funding objective.

Miscellaneous points

The amending regulations also introduce:

  • transitional provisions - in particular, provided a scheme apportionment rule was in place before 13 March 2008, the existing regulations will continue apply to agreements entered into before 5 April 2009 relating to specific pre-considered employmentcessation events or scheme wind-ups which occur on or before that date;
  • complex arrangements for determining whether a "former employer" may be liable for a share of any debt arising;
  • new forms of actuarial certification; and
  • various consequential amendments.

Comment

Employers will be disappointed that there has been little in the way of major policy change between the draft regulations and the amending regulations; in particular, debts can still arise on internal restructuring where there is no change to the covenant supporting a scheme. However, the regulations have broadly benefited from the additional time taken in the redrafting exercise as a number of the anomalies in the draft regulations have been resolved. We will be interested to see which of the available methods for dealing with scheme deficits becomes popular with employers and trustees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.