Easing the pain for charities exiting pension schemes

The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2018 came into force on 6 April 2018. They create a new option for employers to stop participating in a final salary pension scheme, without having to pay a statutory debt at the point of exit. This will be of particular interest to the voluntary sector; indeed, it follows a period of sustained lobbying by charities and others.

The employer debt rules were introduced in the aftermath of the Maxwell scandal, to prevent employers "walking away" from their pension promises. But well-intentioned laws often have unintended consequences and in this case many charities, which (in a more benign financial climate) had joined centralised or "industry-wide" final salary pension schemes, have been put in a very difficult position. The explosion of scheme funding deficits over recent years, coupled with the imposition of the statutory exit debt on an employer that ceases to participate actively in a scheme (often inadvertently: for example, when the last scheme member leaves its employment), has left many charities with a large contingent liability hanging over them, which they can do very little to control or mitigate.

Over the years, legislation has introduced a number of "easements" to help employers manage these liabilities. For example, the flexible apportionment arrangement (FAA), which effectively allows an exit debt to be postponed, if another employer that continues to participate in the scheme agrees to take over the funding liabilities of the departing employer. But this may not help in the "non-associated employers" type of scheme that typically caters for small charities, because the participating employers will usually have no relationship with each other, and therefore no reason (or legal power) to support each other in this way.
The new regulations address this problem by introducing a new "easement" called a deferred debt arrangement (DDA).

The crucial difference from an FAA is that under a DDA the liability remains with the departing employer, which will remain subject to the statutory funding obligations and will be expected to continue making payments under any recovery plan that is in force. But no debt actually has to be paid at the time of exit.
The proposed arrangement must meet the following tests:

• the pension scheme must not be in an "assessment period" for entry to the Pension Protection Fund;
• the trustees of the pension scheme must be satisfied that the charity's "covenant" (i.e. its ability and willingness to meet its obligations to the scheme) is not likely to weaken in the next 12 months; and
• the trustees of the pension scheme must be satisfied that the proposed arrangements are not likely to cause any detriment to the overall interests of the scheme.

A DDA can be terminated

• if the deferred employer again becomes the employer of an active member of the scheme;
• if the deferred employer becomes insolvent;
• if the scheme trustees and the deferred employer so agree; or
• by the scheme trustees, if they are reasonably satisfied that the deferred employer has materially failed to comply with its statutory scheme funding duties.

This is, of course, uncharted territory. In our experience, the trustees of the main voluntary sector pension schemes have generally adopted a helpful approach when charities request an FFA, but it remains to be seen whether they will be equally positive about DDAs.

It is, perhaps, not immediately obvious why pension scheme trustees should conclude that agreeing to a DDA would be in the interests of the scheme membership as a whole. Would it not be better to have the cash up front? On the other hand, could enforcing the exit debt put additional strain on the employer's finances? The courts, and the Pensions Regulator, do recognise that "the main purpose of [a pension] scheme is not served by putting an employer out of business".

The Regulator has said that it will update its guidance on employer debt in due course.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2018