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Multi-employer schemes and employer departures

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At a glance

  • This guidance is to help trustees and employers of multi-employer schemes understand the different mechanisms by which an employer can depart from the scheme. We have updated our existing guidance following amendments to the Employer Debt Regulations.
  • Employers participating in a scheme stand behind the scheme’s ongoing liabilities (technical provisions) and the discontinuance debt (section 75 debt) should it become due. In some cases trustees will need to seek independent advice to help them to accurately identify the benefit structure of the scheme, the employers and their liabilities.
  • Security for a scheme’s liabilities is usually provided by a combination of scheme assets and the employer covenant. Trustees should understand exactly which employers (and other parties) are responsible for meeting the scheme’s liabilities, and for how much.
  • Our code of practice on scheme funding sets out how trustees should engage with employers to ensure that the level of technical provisions is prudent and appropriately reflects the strength of the employer covenant. Any recovery plan agreed by the trustees should take into account what the employer can reasonably afford.
  • Trustees should routinely review and ensure they understand the employer covenant strength. An assessment of covenant should not be a one-off exercise taking place only at the point of a corporate restructure or other corporate activity or event, or for a valuation. Our guidance assessing and monitoring the employer covenant contains further information about considerations for trustees in relation to assessing covenant strength.
  • When an employer departs from a scheme they will normally become liable to pay their share of the scheme’s liabilities; this is their section 75 debt. As a starting point, trustees should always consider whether it is appropriate for the departing employer to pay their full section 75 debt. However, there are some alternatives which may be available in certain circumstances.
  • Where an employer ceases to employ active members for a temporary period, in some cases they can delay their departure from the scheme by providing the trustees with a ‘period of grace’ notice.
  • There are also two mechanisms which allow an employer to depart without becoming liable to pay a section 75 debt, introduced in amendments to the Employer Debt Regulations:
    • from April 2010:
      • de minimis restructuring test – applicable to one-to-one restructures where trustees are satisfied that specified conditions are met indicating that the amount of the departing employer’s liabilities is minimal; and
      • restructuring test – applicable to one-to-one restructures where trustees are satisfied that there is no weakening of the covenant.
  • And there are four mechanisms which allow the employer to depart from the scheme having paid a modified section 75 debt:
    • scheme apportionment arrangement
    • withdrawal arrangement
    • approved withdrawal arrangement
    • regulated apportionment arrangement
  • Finally a mechanism was introduced in amendments to the Employer Debt Regulations from 27 January 2012 which can either prevent a section 75 debt becoming due or modify that debt after which it has become due. This is a flexible apportionment arrangement.
  • Each mechanism has specific criteria and tests which must be met. In addition trustees must consider their fiduciary duties to the scheme’s beneficiaries.
  • Where a departing employer wishes to explore the use of one or more of the mechanisms, we would expect trustees to engage constructively to determine whether agreement to the use of a mechanism is appropriate to the circumstances.
  • In weighing up options, employers and trustees may wish to consider whether the benefit of implementing a particular mechanism is proportionate to the time and cost involved, particularly where the section 75 debt is small relative to the overall costs involved.
  • Whichever mechanism the trustees and employer may decide is appropriate, trustees must ensure that the process relating to that mechanism is followed correctly. Trustees must also decide whether the chosen mechanism is in the best interests of scheme members.
  • The trustees should consider whether, overall, this is part of a series of events where the ultimate aim is to abandon the scheme or where the overall effect would be of material detriment to the scheme.
  • When an employer departs from a scheme this may be an irreversible loss of an important part of the overall covenant. It is vitally important that trustees fully understand the implications of an employer’s departure and any mechanism used, and seek to mitigate any loss of covenant where appropriate.
  • Trustees will normally need to seek independent professional advice to understand and assess how each mechanism will impact the scheme.
  • Trustees can approach the regulator if they are concerned that an employer’s departure or use of a mechanism may be detrimental to the scheme. If employers have similar concerns they can apply to the regulator for clearance (see our separate clearance guidance).
  • The regulator will be concerned if the use of any mechanism or any corporate activity results in material detriment to the scheme, and may consider use of its anti-avoidance powers.

About this guidance

  1. This guidance covers the law relating to section 75 debts for multi-employer schemes as at July 2012. Some of the content only relates to employers’ departures from schemes that occur after 5 April 2010 and some to departures after 5 April 2008.
  2. This guidance must be read in conjunction with the relevant legislation. It does not override the legislation, or provide a definitive interpretation.
  3. Our clearance guidance is also relevant to this area.
  4. The glossary provides explanations of the main terms used for the purpose of this guidance which are shown as emboldened text.
  5. We recognise that the legislation is complex and can apply in different ways to different schemes depending on their circumstances. We expect trustees, where appropriate, to seek independent legal advice on how the legislation applies to their scheme.
  6. Where the employer is insolvent or near insolvency, or the scheme is in or near wind-up, special considerations will apply and trustees should seek advice where appropriate and consider contacting the regulator with any concerns about mechanisms proposed by the employer.

Who is this guidance for?

  1. This guidance is aimed at trustees of all multi-employer defined benefit schemes and employers in relation to these schemes.
  2. In addition, advisers may find it useful when advising their clients if they understand what the regulator expects in these situations. Advisers should note that this is not a technical guide to employer debt legislation.
  3. The guidance is relevant for both open schemes, schemes which are closed to new members and frozen schemes (which have ceased to have active members).

What does this guidance do?

  1. This guidance sets out our expectations of trustees when faced with an employer departing the scheme. It sets out their responsibilities in seeking to ensure that the support for the scheme does not deteriorate.
  2. The guidance also helps employers understand how trustees might approach employer departures and the mechanisms that may be used. The aim is to enable legitimate corporate activity while ensuring the proper safeguards intended for members’ benefits. Employers should ensure that they have an understanding of these issues, not only where they currently participate in a multi-employer scheme, but equally if they are considering participating in such a scheme in the future.
  3. The guidance summarises the mechanisms which may be applied to modify the amount of the section 75 debt payable by an employer or, in certain circumstances, to prevent such a debt arising when an employer departs from a multi-employer scheme.
  4. This guidance also signposts throughout the areas where we become involved in an employer’s departure from a multi-employer scheme. This includes the process for approval of regulated apportionment arrangements and approved withdrawal arrangements, and the use of clearance and anti-avoidance powers where an employer’s departure or the use of a mechanism is detrimental to a scheme.

1: What is a multi-employer defined benefit scheme?

What is a multi-employer scheme?

  1. A multi-employer scheme is a pension scheme that has more than one employer[1].
  2. Schemes may be either segregated or non-segregated. In summary, segregated schemes have a specified proportion of scheme assets that can only be used to meet the liabilities of particular sections of the scheme and not others, and contributions are allocated accordingly. Non-segregated schemes may still have sections, but there will be an element of cross-subsidy between sections or employers. Each section in a segregated scheme is treated as an individual scheme for the purpose of employer debt legislation and for this guidance. It can be complicated to assess whether or not a scheme is segregated, and independent legal advice may be needed to assist with this.
  3. A scheme’s trust deed and rules may provide for partial wind-up when an employer departs from the scheme, and legal advice may be required to determine the impact of this.
  4. For some schemes it may be complicated to ascertain the precise nature of the benefits it provides for legislative purposes[2]. Again, legal advice may assist with this, especially if the scheme does not have a straightforward benefit structure. Section 75 of the 1995 Act only applies to certain descriptions of schemes and employer debt legislation applies in different ways to different types of benefits.
  5. The employers participating in a multi-employer scheme may be part of a group of companies or have common ownership or control, or they may be unrelated companies participating in an industry-wide scheme.
  6. Each employer in a multi-employer defined benefit scheme is responsible for a share of the total amount of scheme liabilities, which may change with changing circumstances. Certain former employers can retain responsibility (see paragraph 21). Trustees should regularly assess whether each participating employer will be able to meet their share of the ongoing liabilities (technical provisions) as they fall due, and their share of the scheme’s section 75 deficit should it become due as a result of an employment-cessation event, employer insolvency or scheme wind-up.

Footnotes for this section

  • [1] Regulation 8 of the Employer Debt Regulations.
  • [2] For example, see the recent cases Houldsworth v Bridge Trustees (Imperial Home Décor Pension Scheme) (Court of Appeal, 2010) and Aon Trust Corporation Ltd v KPMG (a firm) & ors (Court of Appeal, 2005). Also see Part 4 of the Pensions Act 2011 (sections 29 to 33). 

Who supports the scheme?

  1. There are various parties who may stand behind the liabilities of a scheme: most commonly employers and guarantors. There may also be other parties who have agreed to support the scheme under other agreements (who are also referred to as ‘guarantors’ for the purpose of this guidance).
  2. For the purposes of section 75, the term ‘employers’ includes ‘former employers’. ‘Former employers’ can include any employer who has ceased to employ certain members or employees (unless certain conditions are met – see paragraph 34) [3] . This may include employers of ‘frozen schemes’, which are closed to future accrual (ie have no active members). Therefore, references to ‘employers’ in this guidance can also include ‘former employers’.
  3. The employers for the various purposes of legislation may not be identical to the particular employers identified by each scheme’s trust deed and rules or other scheme documentation.
  4. Employers are liable to pay section 75 debts when an employment-cessation event or insolvency occurs or the scheme goes into wind-up.
  5. A guarantor is a party who has agreed to accept liability for the obligations of an employer of the scheme. They may or may not themselves be an employer of the scheme. In both cases they will have entered into a legally binding guarantee to the scheme. There may also be different types of support provided to schemes under enforceable agreements, further details of which are set out in our guidance: assessing and monitoring the employer covenant.
  6. A guarantor can become so for a number of reasons, for example, through a withdrawal arrangement or through negotiations relating to scheme funding, a corporate transaction or other event.
  7. Determining which employers, former employers and guarantors within a group are legally responsible for meeting the scheme’s liabilities, both on an ongoing basis and upon wind-up or other section 75 debt triggers, can be a complex exercise for which trustees should normally seek independent legal advice. Recent cases have considered and decided how ‘employers’ should be identified for various purposes[4].
  8. For example, in the case of PNPF Trust Co Ltd v Taylor & Ors (2010), the High Court considered statutory definitions of employer as well as the definition in the Employer Debt Regulations of an employment-cessation event which applied prior to 6 April 2008. The Court held that before 6 April 2008 a section 75 debt will be triggered when the employer ceases to employ anybody who is eligible  to join the scheme (an "eligible employee") at a time when at least one other person continues to employ eligible employee(s).

  9. Amendments to the Employer Debt Regulations from 6 April 2008 amended the definition of an employment cessation event.

  10. If a scheme has active members (not a frozen scheme) then from 6 April 2008 a section 75 debt is triggered when the employer ceases to employ anyone who is an active member of the scheme at a time when at least one other employer continues to employ active members [5]. However, an employment-cessation event will only occur if the remaining employer is not a ‘defined contribution employer’ (ie, an employer who only has money purchase liabilities). See paragraph 34) .

  11. If the scheme has no active members (a frozen scheme) then an employment-cessation event occurs when the trustees are given a specified notice (see paragraphs 34 and 36).

  12. However, for scheme funding purposes, the eligible employee test continues to apply on and after 6 April 2008. So, after 6 April 2008, it is possible for an employer to cease to be an employer for the purposes of section 75 debts because it has ceased to employ active members (and it has paid or otherwise dealt with that debt, as summarised in paragraph 34), but that employer could continue to be liable for the ongoing funding of the scheme until they cease to employ an eligible employee.

  13. Trustees should ensure that they understand who is actually sponsoring their scheme, so they need to be clear on who the employers, former employers and guarantors are. Further information is included in our statement on identifying your statutory employer (PDF, 50.2kb, 12 pages). Understanding who a scheme’s employers are will sometimes require a review of historical employer departures, for which trustees are likely to need legal advice on applicable legislation at the relevant time. [6]
  14. Trustees will need to regularly monitor the ability of the employers, former employers and guarantors to meet their obligations to the scheme so it is important that all these parties have a full understanding of their legal responsibilities. This will help enable the covenant to be properly assessed, to identify and calculate section 75 debt triggers and debts, and to assess the impact of any employer departure or any mechanism proposed to modify a section 75 debt.

Footnotes for this section

  • [3] Regulations 6ZA, 9 and 13 of the Employer Debt Regulations.
  • [4] See in particular PNPF Trust Co Ltd v Taylor & Ors (Chancery Division, 2010) and Hearn v Dobson (Chancery Division, 2008).
  • [5] Regulations 6ZA of the Employer Debt Regulations.
  • [6] For example, the Employer Debt Regulations have been subject to numerous amendments since they came into force on 6 April 2005 and other regulations applied to section 75 debts before that date.

When does an employer depart from a scheme?

  1. For the purposes of section 75 of the 1995 Act an employer will depart from a scheme and a section 75 debt will become due if:
    • on or after 6 April 2008 [7]it ceases to employ at least one active member when another employer (who is not a 'defined contribution employer'[8]) continues to employ at least one active member (this is known as an ‘employment-cessation event’); or
    • on or after 6 April 2008 [9]it gives notice of an employment-cessation event to the trustees of a frozen scheme; or
    • an insolvency event occurs; or
    • the scheme begins winding up.
  2. ‘Former employers’ remain liable for section 75 debts when they become due, including on insolvency or scheme wind-up, and will continue to be so until and unless any of various conditions are met[10]. These include:
    • that a section 75 debt has become payable by the former employer as a result of an employment-cessation event or insolvency, and that debt has been paid in full
    • that an employment-cessation event or insolvency occurred but no debt became due
    • that a 'de minimus restructuring test', 'restructuring test' or 'flexible apportionment arrangement' takes effect and the relevant conditions apply
  3. An employer in a frozen scheme may voluntarily undergo an employment-cessation event notwithstanding that it does not employ any active members. This is achieved by giving notice to the trustees, stating that an employment-cessation event will be treated as having occurred on a specified date that is not more than three months earlier or later than the date the notice is given. Trustees should ensure that if they are given such a notice the scheme will still have a remaining employer who is not a defined contribution employer. Otherwise there is a risk that the scheme may lose the support of a statutory employer for its defined benefit liabilities, which is likely to have adverse consequences for members.  For further information see the regulator’s statement identifying your statutory employer (PDF, 50.2kb, 12 pages).
  4. Before 6 April 2010, there was only one prescribed method of preventing an employment-cessation event occurring: this was a period of grace, described in Section 2 of this guidance. Where a period of grace applies (and relevant conditions are met), the employment-cessation event does not occur, therefore a section 75 debt is not triggered, but the employer does not depart from the scheme.
  5. Three further mechanisms have been introduced since 6 April 2010 which prevent an employment-cessation event occurring, thereby ensuring the section 75 debt is not triggered. Unlike the period of grace, these mechanisms allow an employer to depart from a multi-employer scheme without triggering or paying a section 75 debt. These are known as the ‘restructuring test’, the ‘de minimis restructuring test’ and flexible apportionment arrangements. Further information about these mechanisms is given in Section 4 of this guidance.
  6. When an employer departs from a multi-employer scheme, provided that none of these four mechanisms (a period of grace, the restructuring test, the de minimis restructuring test or the flexible apportionment arrangement) applies, a section 75 debt may be triggered. When a section 75 debt is triggered, the trustees will usually need to ask the scheme actuary to calculate the liability share which is payable by the departing employer.
  7. In some circumstances, trustees may decide that is appropriate to use one of the four prescribed mechanisms which result in modification of the departing employer’s section 75 debt:
    • a withdrawal arrangement
    • an approved withdrawal arrangement
    • a scheme apportionment arrangement
    • a regulated apportionment arrangement

    Further information about each of these mechanisms is given in Section 4 of this guidance.

Footnotes for this section

  • [7] As described in paras 27 and28, this condition is different for employer departures prior to 6 April 2008 further to an amendment to the employer debt regulations.
  • [8] Defined in regulation 6ZA of the Employer Debt Regulations.
  • [9] This employment-cessation event by notice for frozen schemes was introduced by amendment to the employer debt regulations (regulation 9(4)). 
  • [10] Full conditions are set out in regulation 9 of the Employer Debt Regulations.

Key points for this section

  • Security for a scheme's liabilities is usually provided by a combination of scheme assets and the employer covenant.
  • Trustees should understand the roles and responsibilities of the employer and any other parties that stand behind the scheme.
  • It can be complex to determine which employers and other parties are legally responsible for meeting a scheme's liabilities and independent legal advice may be needed.
  • It can be complex to determine the nature of benefits provided by a scheme and independent legal advice may be needed.

2: Considerations for employers

  1. Employers stand behind scheme funding both on an ongoing (technical provisions) basis and on the full section 75 deficit (annuity buy-out) basis should they depart from the scheme. The regulator understands that in order to run a business to its full potential it is often necessary to undergo company group restructures, to remove certain employers from a scheme, and/or to replace them with others. This may trigger section 75 debts.
  2. An employer usually departs from a multi-employer scheme when it undergoes an employment-cessation event, enters insolvency, or when the scheme winds up.
  3. In order to ensure that the scheme liabilities can be accurately attributed to the relevant employers, employment records should be kept up to date. Employers will need to keep and provide trustees with the necessary information to identify and calculate the liabilities.
  4. When an employer departure triggers an employer debt under section 75 of the 1995 Act, the trustees are entitled to expect the departing employer to pay its full section 75 debt (as calculated by the trustees and scheme actuary) within a reasonable timescale, and enforce payment of that debt. However, the employer may propose that one of the alternative mechanisms is used, where available.
  5. It is important that an employer departure does not result in overall detriment to the scheme.
  6. In acting consistently with their fiduciary duties and in assessing any likely impact that an employer’s departure may have on the security of members’ benefits, trustees not only need to consider the statutory tests that determine whether use of a particular proposed mechanism is possible, but also whether agreeing to the use of one of the alternatives to full payment of the departing employer’s unmodified section 75 debt would be appropriate.
  7. In order to assess whether use of one of the particular mechanisms would be possible and appropriate, trustees will require certain information from the employer. We expect employers to comply with such requests in line with their legal obligations[11], and to engage openly with trustees to ensure that the decisions made by the trustees are based on full and accurate information. Trustees should be prepared to commit to confidentiality where such information is price sensitive. We would not expect any confidentiality agreement to prevent trustees from sharing information with the regulator.
  8. We expect employers to give trustees sufficient time to consider any proposal properly, and it may be appropriate for employers to meet the cost of any advice that trustees need for their considerations.
  9. In weighing up options, employers and trustees may wish to consider whether the benefit of implementing a particular mechanism is proportionate to the time and cost involved, particularly where the section 75 debt is small relative to the overall costs involved.
  10. We may consider use of our anti-avoidance powers (which have their own distinct tests) if we are concerned that any alternative to full payment of the departing employer’s liability share is being used in order to abandon the scheme or is likely to be of material detriment to the scheme.
  11. We will also be concerned about any other arrangement or corporate activity (for example which has the result of preventing a section 75 debt from triggering) which is likely to be of material detriment to the scheme.
  12. Employers can apply to the regulator for clearance in relation to our anti-avoidance powers for ‘type A events’. Please refer to our clearance guidance for further information on what this involves, and for further information on circumstances in which it may be appropriate to consider applying to the regulator for a clearance statement.

Footnotes for this section

  • [11] Including those set out in regulation 6(1) of the Scheme Admin Regulations.

Periods of grace

  1. If an employer ceases to employ any active members and an employment-cessation event occurs, but intends to employ an active member in the future, it may give the trustees a notice called a ‘period of grace’ [12]notice. The notice must be given to the trustees before, on or as soon as possible (and in any event within two months) after the employment-cessation event. The effect of the notice is that the employer will be treated as if they were still an employer of active members during the period of grace, as though an employment-cessation event had not occurred.
  2. If the period of grace notice is provided, the period of grace begins when the employer ceases to employ active members.
  3. The default length of a period of grace is 12 months from the date the employer ceases to employ any active members. However, the trustees may agree in writing, before the period expires, to extend the period to a date which is more than 12 months, but less than 36 months from the date the employer ceased to employ active members.

  4. The trustees can consent to extending the period of grace on multiple occasions, provided that the period of grace does not exceed 36 months in total. When considering whether to consent trustees will usually require evidence of the employer's intentions to employ another active member and an explanation as to why it will take so long.

  5. If the employer employs an active member during the period of grace, the period of grace ends and the employer will be treated as if the relevant employment-cessation event had not occurred.
  6. If the employer does not provide the period of grace notice within the statutory time limit stated in paragraph 53 , the section 75 debt will remain due as at the date the employment-cessation event occurred. The trustees should arrange for this to be calculated and certified.
  7. If, during the period of grace, the employer:
    • does not employ an active member by the last day of the period of grace;
    • no longer intends to employ an active member by the end of the period of grace (in which case the employer is required to notify the trustees); or
    • suffers an insolvency event,

    then the employer will be treated as if the period of grace had not applied. This means that an employment-cessation event will be treated as having occurred when the employer ceased to employ at least one active member, and the trustees should arrange for the employer’s section 75 debt to be calculated and certified. It is for this reason the trustees should be in contact with the employer to check on its progress in the recruitment of another active member.

  8. We expect employers to use this provision only for genuine cases of intended employment of active members and not as a means to delay calculation or payment of any section 75 debt that may arise.

questionKey points from this section

  • It is important that an employer departure does not result in overall detriment to the scheme.
  • We may consider use of our anti-avoidance powers if we are concerned that any corporate activity or use of a mechanism is likely to be of material detriment to the scheme.
  • Employers can apply for clearance in relation to our anti-avoidance powers for ‘type A events’.
  • Employers should ensure that records are kept up to date and that relevant information is shared with the trustees.
  • Trustees must act in accordance with their fiduciary duty as well as the requirements of the Employer Debt Regulations.
  • Where an employer ceases to employ active members for a temporary period, in some cases they can delay their departure from the scheme by providing the trustees with a ‘period of grace’ notice.

Footnotes for this section

  • [12] Regulation 6A of the Employer Debt Regulations, as amended from 27 January 2012.

3: What do we expect of trustees?

Understand the schemes liabilities and who is responsible for them

  1. Trustees should ensure that they fully understand the scheme’s liabilities including any orphan liabilities, which liabilities are attributable to which employers and how they would be met if an employer departed the scheme, became insolvent, or the scheme were to wind up.
  2. This is important as the employers participating in a scheme stand behind the ongoing liabilities (technical provisions) of a scheme and the section 75 deficit should section 75 debts become due.
  3. The ongoing liabilities, or technical provisions, represent the level of funding that is required in order to pay the members’ benefits as they fall due, until the last member or beneficiary dies or transfers out of the scheme, assuming that all of the employers continue to support the scheme.
  4. Our code of practice on scheme funding sets out how trustees should engage with employers to ensure that the level of technical provisions is prudent and appropriately reflects the strength of the employer covenant. Any recovery plan agreed by trustees should be set taking into account what the employer can reasonably afford.
  5. The section 75 deficit is the amount, over and above the value of the scheme assets, which the scheme actuary estimates would be required to meet specified estimated expenses and fully buy out the scheme benefits with annuities from a regulated insurer. In a multi-employer scheme each employer has a liability share, which is calculated as a proportion of the entire section 75 deficit for the scheme and becomes payable to the scheme as a section 75 debt. If an employer is seeking to depart from the scheme, it is the responsibility of the trustees, having consulted with the scheme actuary and the departing employer, to determine the share of liabilities attributable to each employer within the multi-employer scheme.
  6. Broadly[13], an employer is liable for the scheme liabilities for each of its own employees, any other liabilities that may be attributable to it and a proportionate share of orphan liabilities (see paragraph 68). However, it can be complex to ascertain each employer’s exact share, so independent legal advice may be needed.
  7. In order to ensure that the scheme liabilities can be accurately attributed to the relevant employers, trustees should ensure that records of a members employment are kept up to date. The regulator has published guidance on record-keeping, because we recognise that obtaining and keeping these details up to date will help ensure that any decisions are based on accurate information. The guidance includes targets for the quality of core scheme data which will underpin good decision making.
  8. There may be members of the scheme (whether deferred or pensioners) whose benefits have not accrued as a result of service with one of the employers. If scheme liabilities in respect of these members are not attributed to any particular employer then they are known as orphan liabilities. Therefore they still make up a part of the overall scheme liabilities, in some cases a very significant part, and trustees should ensure that they understand how these liabilities will normally be shared amongst the employers for the purpose of calculating each employer’s liability share. The method for calculating the liability share for each employer is detailed in regulation 2(1) of the Employer Debt Regulations.
  9. In some cases, liabilities that are attributable to a departing employer and corresponding assets may be transferred out of the scheme within 12 months after that employer's section 75 debt has triggered. If this happens, and the employer has notified the trustees that a 'relevant transfer deduction' will apply to its liabilities, then the employer's liability share may be reduced accordingly. This might apply where, for example, the departing employer participates in a different scheme and its employees transfer their past service to that scheme.
  10. It is important for trustees to understand how the scheme liabilities are shared between the employers in order for them to properly assess the risks in the scheme. For example, a scheme may have one employer with a strong covenant and several others with a weak covenant, a situation which may have arisen for historical reasons. If an employer with a strong covenant becomes responsible for only a small proportion of the total scheme liability when it departs from the scheme (for example, because it only ever employed relatively few scheme members), the scheme is put at risk even if it pays its full liability share. If the weaker employers are unable to meet their subsequent section 75 debts, there will be a funding shortfall in the scheme. This situation is not unusual, and trustees faced with such risks should seek to bolster the financial support for the scheme, for example during funding negotiations by seeking arrangements such as cross-guarantees or joint and several liability for section 75 debts. Our guidance on assessing and monitoring the employer covenant contains further information about these types of arrangement.
  11. The section 75 debt of an employer is a discontinuance debt and is distinct from ongoing funding obligations. Care should be taken not to double-count deficit payments paid as part of a recovery plan as payments towards section 75 debts, or vice versa. A recovery plan should reflect the assessed covenant of the employer whereas a section 75 debt is often a result of an event that changes the covenant.

Footnotes for this section

  • [13] Full details of an employer’s liabilities are set out in regulations 5 and 6 of the Employer Debt Regulations.

Understand your employer covenant

  1. In this section, any reference to ‘employers’ also includes, where relevant, guarantors or other parties with obligations to the scheme.
  2. Trustees should seek to ensure that the scheme funding position and security of the employer covenant combine to offer adequate support for the scheme at all times.
  3. We expect trustees to actively and regularly monitor the strength of the employer covenant supporting the scheme, as this informs decisions on all aspects of the scheme’s funding and may provide an indication of whether or not an employer departure is on the horizon, and what the implications of that would be.
  4. This encompasses the need to fully understand the structure of the group, which employers (or other parties) within the group have a legal obligation to support the scheme, and the financial strength of the employers (or other parties) with those obligations. Where companies with an obligation to the scheme sit within the group, it may be relevant to the scheme’s returns in an insolvency situation. For example, if the principal employer to the scheme is merely the group’s parent company, then its creditors may be structurally subordinated to creditors of its subsidiaries (which would include the main trading entities in the group). Therefore, in an insolvency situation, the principal employer’s support for the scheme may therefore be less valuable than direct support from the subsidiaries would be. The structure and operations of the group, and inter-company transactions, may also provide an indication of the employers’ position or future.
  5. In many circumstances, trustees are likely to consider that they do not have the detailed knowledge, experience or independence needed to make an objective assessment. In these circumstances we expect relevant independent professional advice to be sought. Where trustees decide not to seek such professional advice, they should document their reasons.
  6. We expect trustees to react accordingly to changes in the covenant strength. Our guidance assessing and monitoring the employer covenant sets out best practice that we expect trustees to follow in this regard, including the legal and financial aspects and the type of information they should request from the employer in order to do this.
  7. When considering the impact of an employer departing the scheme, trustees should take steps to understand the short, medium and long-term implications for the scheme and the wider group. In the case of industry-wide schemes, trustees may also need to attain an understanding of the covenant of the other employer groups.

What happens when a scheme winds up and how does this impact on covenant?

  1. When assessing covenant it will be necessary to establish which employers will owe which section 75 debts on employer departure but also when the scheme winds up (which may be a result of employer insolvency).
  2. After a scheme begins winding up, the trustees are usually obliged to ensure that section 75 debts are calculated and to seek to collect those debts.
  3. Winding up is not treated as an employment-cessation event, therefore periods of grace, withdrawal arrangements, approved withdrawal arrangements and the restructuring easements, all of which are explained later in this guidance, will not be available to prevent or modify section 75 debts triggered by wind-up. Flexible apportionment arrangements are also not available for schemes in wind up. 
  4. Trustees should recognise that upon wind-up they often will not be able to alter each employer’s liability share to get the maximum return for the scheme (for example by seeking additional funding from the financially strong employers if the trustees are unable to recover the full liability share(s) owed by the weaker employers). However, a financially strong employer could agree to pay the debt due from another employer, should it wish to do so.
  5. Prior to a scheme beginning to wind-up, trustees may need to take legal advice to ascertain whether the scheme rules (and any other documents) contain any enforceable provisions that oblige employers (including any former employers) to fund the scheme on wind-up, that are in addition to the requirements of section 75 of the 1995 Act and the Employer Debt Regulations. If no such provisions exist, trustees may consider whether a scheme apportionment arrangement could assist (see Section 4) or whether the employers or other companies would be prepared to provide guarantees or cross-guarantees, or to become jointly and severally liable, for the scheme’s section 75 debts. As such measures could improve the scheme’s return on insolvency they will generally improve the overall employer covenant. Our guidance on assessing and monitoring the employer covenant provides further information about these types of consideration.

Understand the options, assess the impact and mitigate the risks

  1. When an employer ceases to be responsible for supporting the scheme this may be an irreversible loss of an important part of the overall covenant. It is therefore vitally important that trustees fully understand the implications of the employer’s departure and any mechanisms used and seek mitigation where appropriate.
  2. As a starting point trustees should always consider whether it is appropriate for the employer to pay its full liability share.
  3. However, the trustees may decide that in the circumstances it is appropriate to agree to use one of the alternative mechanisms detailed in Section 4 of this guidance, either in isolation, or when combined with increased security for the scheme in the form of additional mitigation, such as guarantees or contingent assets.
  4. Trustees will not always be able to justify agreeing to modify a departing employer’s section 75 debt. For example, where the departure of an employer has the effect of weakening the overall covenant and there is little prospect of obtaining appropriate mitigation from other employers or a third-party or where the remaining employers are at risk of insolvency, we would generally expect trustees to pursue payment of the departing employer’s liability share.
  5. Where the departing employer is willing to pay its liability share in full, we would normally expect trustees to accept payment without considering any of the alternatives. Whether the departing employer can afford to pay its liability share is likely to be a relevant factor for trustees to consider for most employer departures.
  6. If the liability share is not sufficient to mitigate for the loss of covenant, then trustees should consider seeking additional mitigation (for example in the situation described in paragraph 70).
  7. A significant deterioration in the covenant strength indicates that there may be a need to revise any recovery plan that is in place, and in some cases it may also be appropriate for the trustees to call a new valuation and revise the technical provisions.
  8. Where a departing employer wishes to explore the use of one or more of the alternatives to paying its section 75 debt in full, we would expect trustees to engage constructively to determine whether use of an alternative is appropriate to the circumstances, and would not place the scheme at risk of a material weakening of covenant or scheme abandonment.
  9. Trustees should note that use of any non-statutory arrangements to modify a scheme’s section 75 debt may affect the scheme’s eligibility for entry to the Pension Protection Fund (PPF)[14].
  10. All of the 4 prescribed mechanisms which result in modification of the section 75 debt require the trustees (and in some cases also the regulator) to agree to the arrangement. Flexible apportionment arrangements also require trustee consent.
  11. We expect trustees to consider obtaining appropriate independent professional advice when deciding whether to agree to the use of one of the alternatives. Where trustees decide not to seek professional advice, they should document their decision not to do so, by reference to the possible consequential risks to the scheme.
  12. Trustees should also bear in mind that when an employer departs from a non-segregated scheme and pays its liability share in full or implements one of the alternative mechanisms, then unless the scheme is sectionalised or partially winds up in accordance with the scheme rules, any payment made by the departing employer is likely to go towards funding across the whole scheme, not in respect of the departing employer’s liabilities alone.
  13. Trustees should be cautious about consenting to the use of any of the alternatives far in advance of the time of an employer departing the scheme. It reduces the likelihood that the full effect and/or impact can be properly assessed, or that the statutory tests that determine whether any of the alternatives are possible can be properly considered or conducted. It is also less likely that any additional (non-statutory) conditions that the trustees decide would be appropriate can be properly assessed and included. If agreeing to an arrangement in advance, trustees should consider negotiating additional provisions to protect the scheme against events or changes in circumstances which may happen before an employer actually departs from the scheme.
  14. In discussions with the departing employer, remaining employers and advisers, trustees should ensure that all relevant matters in relation to each available alternative have been properly explored and all facts accurately established and documented. In many cases the options open to the trustees and the departing employer will be limited by the circumstances. The feasible options should be thoroughly explored to ensure proper understanding of their implications.
  15. We expect trustees to negotiate the type and terms of the arrangement with the departing employer, remaining employers and any guarantor(s) or other relevant parties, as appropriate, to ensure that the arrangement entered into is in the best interests of scheme members. Where appropriate, trustees should seek to negotiate the inclusion of additional conditions for any of the mechanisms over and above those specified in the legislation, and the provision of additional security should this be needed to support the scheme.
  16. Specific statutory tests must be met for each of the mechanisms. If these tests are met they will, to some extent, safeguard against detriment to the scheme as a result of an employer departing the scheme without paying its liability share in full. In addition to ensuring that the statutory tests are met, we expect trustees to act in accordance with their fiduciary duties and to fully consider the scheme’s ongoing needs and financial support requirements in all circumstances.
  17. Trustees should consider the impact on the scheme’s funding position in terms of how the strength of the employer covenant may be affected, in relation to the ability to meet the scheme’s funding needs both now and in the future (taking into account, for example, the risk of insolvency and any future plans of the employer).
  18. We expect trustees to understand the reasons for an employer’s departure from the scheme, or for the use of a mechanism proposed by the employer. Trustees should seek to understand all relevant circumstances, including any related disposals or substitutions of employers, or changes to the wider group of companies. The departure or mechanism may be part of a series of events that may affect the strength of the overall covenant and financial support for the scheme. We expect trustees to seek to establish whether the employer departure in question is a one-off event or part of a larger transaction or a wider change in strategy. Some information in relation to employer departures and restructuring may be sensitive and therefore trustees and employers may want to consider the use of confidentiality agreements.
  19. If an employer’s departure or the use of a mechanism is part of a series of events, then as well as assessing the overall effect of all events, trustees (and employers) should assess each event separately to establish its impact on the scheme and members’ benefits in terms of both its immediate and possible future effects.
  20. The trustees should consider whether, overall, this is part of a series of events where the ultimate aim is to abandon the scheme or where the overall effect would be of material detriment to the scheme.
  21. The regulator will be concerned if any corporate activity or use of a mechanism results in scheme abandonment or material detriment to the scheme. It is possible for the requirements of the tests for each available alternative to be fulfilled but for there still to be a detriment to the scheme; this is why it is important for trustees to consider the widest aspects of each test and seek mitigation where appropriate. We will also be concerned about any other arrangement (for example which has the result of preventing a section 75 debt from triggering) which is likely to be of material detriment to the scheme.
  22. If trustees have concerns about the possibility of material detriment or scheme abandonment they should approach the regulator.

Footnotes for this section

  • [14] The Pension Protection Fund (Entry Rules) Regulations 2005.

Understand the process

  1. Trustees should ensure that they understand how a section 75 debt is triggered, how an employer’s section 75 debt is determined and how each of the available alternatives to payment of the employer’s liability share would operate.
  2. Failure to properly carry out the process can potentially result in the departing employer’s obligations to the scheme not being discharged as intended or the strength of the employer covenant being eroded. Trustees need to understand the roles of the various parties involved, and establish who is responsible for completing each part of the process. Good communication between the trustees, employers and each party’s advisers is likely to aid this.
  3. Prior to and during discussions about an employer departing the scheme, trustees should ensure that all scheme documentation is accurate and up to date and, as stated in paragraph 67, that they have adequate information about scheme members’ current and previous employment.
  4. Trustees should also ensure that their consideration of the key issues in relation to a departing employer is properly minuted and their decision making is accurately documented.

Understand and manage conflicts

  1. Trustees should understand the importance of identifying and managing or avoiding any conflicts of interest or duty on the trustee board when considering the options for dealing with a departing employer. This is particularly important with regard to the assessment of whether the overall covenant strength will change as a result of a particular employer’s departure, any mechanism proposed, and when considering any appropriate mitigation. Independent legal advice may need to be sought in relation to any possible conflicts.
  2. Where the trustees themselves have sufficient experience and expertise to carry out this assessment and therefore do not seek professional advice, the possibility of conflicts of interest should also be considered.
  3. We have issued separate conflicts of interest guidance on how we expect trustees to assess and address conflicts.

questionKey points from this section

  • Trustees should regularly review and ensure they understand the employer covenant strength. An assessment of covenant should not be a one-off exercise taking place only at the point of a corporate restructure or other corporate activity or events, or for a valuation.
  • It is important that trustees fully understand the implications of an employer’s departure and seek appropriate mitigation for any loss of covenant.
  • As a starting point trustees should consider whether it is appropriate for the departing employer to pay their full liability share. However, there are some alternatives which, if available, can result in modification of the section 75 debt.
  • Trustees must ensure any chosen mechanism is in the best interests of scheme members, and that the process relating to that mechanism is followed correctly.
  • We will be concerned if the use of any mechanism or any corporate activity results in material detriment to the scheme, and may consider use of our anti-avoidance powers.
  • We expect that trustees will normally need to seek independent professional advice when they encounter many of the circumstances described in this guidance.

4: Important aspects of each mechanism

  1. From 27 January 2012 there are, in total, seven prescribed ways in which an employer departing a multi-employer scheme can have its section 75 debt modified or removed.
  2. When considering these options it is important that trustees take independent professional advice on their appropriateness in the circumstances in which the employer is departing the scheme.
  3. Our guidance on assessing and monitoring the employer covenant contains further information about how trustees can assess the impact of such activity on the security of members’ benefits.

Flexible apportionment arrangements

  1. If an employer departs from a scheme using this mechanism and the flexible apportionment arrangement conditions (see paragraph 120 below) are met: 
  • where an employment-cessation event occurred before those conditions were met then the section 75 debt which arose will be modified so that no debt became due; or
  • where an employment-cessation event occurs before the end of the period of 28 days beginning when those conditions are met, then that event will not be classed as an employment-cessation event.
     
    In either of these scenarios, if the employment-cessation event occurred after 5 April 2008, then the employer will leave the scheme without needing to pay a section 75 debt.
  1. Flexible apportionment arrangements may be used for schemes which remain open to future accrual, or in circumstances for 'frozen schemes' which are closed to future accrual. For frozen schemes the flexible apportionment arrangement conditions must be met and an event must have occurred which would have been an employment-cessation event if the scheme had not become a frozen scheme.
  2. A flexible apportionment arrangement takes effect on the later of the dates on which both the flexible apportionment conditions (see paragraph 120 below) are met and the employment-cessation event (or the event which would have been an employment-cessation event) occurs.
  3. The trustees may decide that any costs incurred by them as a result of a flexible apportionment arrangement are to be met by the departing employer or replacement employer(s) or both. [16]
  4. The departing employer and the replacement employer(s) must be employers in relation to the same multi-employer scheme and both must employ (or have in the past employed) at least one defined benefit active member. The departing employer and the replacement employer(s) must not be subject to an insolvency event.
  5. In summary, for a flexible apportionment arrangement to take effect, all of the following conditions must be met:  
  • The trustees are satisfied that the flexible apportionment arrangement funding test is met or the test is not required.
  • One or more of the replacement employers must take over responsibility for all the departing employer’s liabilities of the scheme, as they stand immediately before the flexible apportionment arrangement takes effect.
  • The trustees, the departing employer and the replacement employer(s) must consent in writing.
  • The departing employer must not be in a period of grace.
  • The scheme is not being wound up or in a PPF assessment period or and the trustees are satisfied that a PPF assessment period is unlikely to begin in the 12 months after the flexible apportionment arrangement takes effect.  

Funding test – flexible apportionment arrangement

  1. Before entering into a flexible apportionment arrangement the trustees must be reasonably satisfied that both parts of the funding test are met:
    • When the arrangement takes effect the remaining employers will be reasonably likely to be able to fund the scheme, so that it will have sufficient and appropriate assets to cover its technical provisions (taking into account any changes to the technical provisions that may need to be made as a result of the flexible apportionment arrangement, for example because of a consequential reduction in covenant strength). [17]
    • The effect of the arrangement will not adversely affect the security of members' benefits as a result of any:
      • material change in legal, demographic or economic circumstances, as described in the Scheme Funding Regulations[18],  that would justify a change in the methods or assumptions used in the last calculation of the schemes technical provisions (a change in the trustees' assessment of the employer covenant strength may justify a change in relevant assumptions); or
      • material revision to any existing recovery plan (for example a longer recovery period).
  1. If the trustees have not received the schemes first actuarial valuation under the 2004 Act[19], then the funding test differs. [20]
  2. When assessing the funding test we would expect trustees to assess the effect of the flexible apportionment arrangement on the schemes technical provisions, taking into account those factors set out in our code of practice on scheme funding.
  3. The funding test does not have to be met where:  
  • the funding test has been met for a different flexible apportionment arrangement;
  • the flexible apportionment arrangement takes effect at the same or similar time to the other flexible apportionment arrangement for which the funding test is met; and
  • the trustees are satisfied that the funding test would be met if it was carried out again.  

Consents required

  1. In order to enter into a flexible apportionment arrangement, the following consents must be obtained:  
  • the consent of the trustees
  • the consent of the departing employer
  • the consent of all the replacement employers  

Key considerations

  1. Before agreeing to a flexible apportionment arrangement, the trustees must be satisfied that the arrangement is consistent with the interests of the scheme members. Even if a flexible apportionment arrangement is possible, it might still be inappropriate to proceed if trustees are not satisfied that, in the circumstances, it is in the members' best interests. If this is the case trustees should consider whether any other mitigation should be put in place.
  2. For trustees to agree to use one funding test to cover more than one flexible apportionment arrangement, the employer departures being covered by the flexible apportionment arrangements must be taking place at broadly the same time.
  3. When considering whether the funding test would be met for a different flexible apportionment arrangement if it was carried out again, the trustees should consider whether the test would still have been met if they had included the employer departing under the new flexible apportionment arrangement in the original funding test.
  4. For example, we would not expect trustees to consider the funding test to be met for a different flexible apportionment arrangement where the original funding test considered the departure of a small, loss making employer, and the employer departing under the new flexible apportionment arrangement is a larger profitable employer.
  5. In carrying out the funding test trustees must consider the scheme's position after the flexible apportionment arrangement takes effect relative to its position before the arrangement takes effect. The trustees should compare the overall covenant prior to the flexible apportionment arrangement taking effect with the overall covenant afterwards. Because of this the trustees should not consider the funding test or consent to a flexible apportionment arrangement too far in advance of the arrangement taking effect (see also paragraph 96).
  6. If the replacement employer(s) is already a participating employer before the flexible apportionment arrangement takes effect then it may already have its own liabilities to the scheme in respect of its own employees. It is important that trustees take this into account when considering whether the funding test is met. For example, the overall covenant is likely to reduce unless all of the departing employer's business and assets are transferred to the replacement employer(s) (and there are no other issues which impact covenant such as security for lending or structural subordination to other creditors).
  7. Where there is more than one replacement employer, each employer will become responsible for the liabilities it agrees to take on. The replacement employers will not be jointly and severally liable for the whole amount of these liabilities unless that is expressly agreed by the parties.
  8. The pension liabilities for which the replacement employer takes over responsibility are wide-ranging and include the departing employer's share of the schemes orphan liabilities (part of its 'liability share').
  9. The trustees may decide to reduce the liabilities for which the replacement employer takes over responsibility, to take into account a part payment of a section 75 debt (or equivalent) made by or on behalf of the departing employer. That payment must be over and above any amount owed by the departing employer under the schedule of contributions [21] and the amount of the reduction in liabilities should be commensurate with the amount of the payment made. Trustees will need to take actuarial advice on how much of that payment translates into a reduction of the liabilities to be transferred across. 

    Footnotes for this section

    • [15] Regulation 6E of the Employer Debt Regulations.
    • [16] Regulation 6E(6) of the Employer Debt Regulations.
    • [17] Note: the trustees may consider that this is met by reference to the remaining employers ability to meet the schedule of contribution payments (existing or revised because of the arrangement). See regulation 2 (4C) of the Employer Debt Regulations.
    • [18] Regulation 5(4)(d) of the Scheme Funding Regulations.
    • [19] Sections 221 - 233.
    • [20] Regulation 2(4B) of the Employer Debt Regulations.
    • [21] Put in place under section 227 of the 2004 Act.

    The de minimis restructuring test

    1. If an employer departs from a scheme using this mechanism the departure will not be classed as an employment-cessation event and the employer will leave the scheme without a section 75 debt triggering.
    2. Where a corporate restructuring is due to take place which involves one departing employer and one receiving employer, the employer who intends to depart from the scheme can write to the trustees to ask them to assess whether four conditions are met:
      • the scheme is funded to at least Pension Protection Fund (s179) levels
      • the number of ‘relevant members’ (who had accrued defined benefits as a result of pensionable service with the departing employer) does not exceed the greater of twoindividuals or 3% of the total number of scheme members who have accrued defined benefits in the scheme
      • the total accrued annual pensions of relevant members, including pensions in payment and pensions not in payment, does not exceed £20,000 (this amount will increase by £500 every 6 April, ie on 6 April 2011 it increases to £20,500)
      • any restructurings under the de minimis restructuring test[22] that have taken place in the last three years involve in total, together with the current proposed restructuring, no more than the greater of five relevant members or 7.5% of the total number of scheme members who have accrued defined benefits in the scheme, and no more than £50,000 of accrued annual pension.
    3. For the purpose of this guidance this assessment is known as the ‘de minimis restructuring test’.
    4. Both the departing employer and receiving employer must employ at least one active member accruing defined benefits in the scheme. The receiving employer must either be associated with, or be the new legal status of the departing employer. Neither employer can have undergone an insolvency event. In the case of the receiving employer all these conditions must be met on the date of the restructuring.
    5. If the trustees, having taken independent professional advice as appropriate, are satisfied that the de minimis restructuring test has been met, they must confirm this in writing to the relevant employers.
    6. Trustees may decide that any costs incurred by them as a result of an employer departure using the de minimis restructuring test are to be met by the departing employer or the receiving employer, or both[23].
    7. If the departing employer transfers responsibility for all of its assets, employees, scheme members and liabilities in relation to the pension scheme to the receiving employer within the timescales set out in the Employer debt regulations, and the employers provide written confirmation to the trustees of the date when this transfer is carried out, then the departure will not be an employment-cessation event and no section 75 debt will be triggered. When this has occurred and all relevant conditions are met, the departing employer will cease to be an ‘employer’ for the purposes of section 75 (but see paragraph 34 ).

    Key considerations

    1. This mechanism is only available in relation to employer departures that would otherwise be employment-cessation events and which are ‘one-to-one’ restructures involving a transfer of assets, employees, scheme members and pension liabilities, between one departing employer and one receiving employer, neither of whom have had an insolvency event. However, it can also apply to a single employer that seeks to change its legal status (in which case the receiving employer is the entity with the new status).
    2. The receiving employer may be either a new employer created for the purpose of the restructuring, or an existing company, which may or may not have participated in the scheme before the restructuring.
    3. The de minimis restructuring test is different from the other mechanisms in that it merely requires the trustees to confirm that the number of members and monetary amounts involved fall within the prescribed parameters. If the trustees decide that the test is met they have no further discretion to refuse the arrangement.
    4. However, it is important that all of the steps set out in the legislation are properly followed and completed. If, within 6 years of the restructuring transfer, it becomes apparent that key steps were not completed properly or on time, the de minimis restructuring will not be effective. This means that a section 75 debt will have been triggered at the point when the departing employer ceased to employ any active members, and the departing employer will remain an ‘employer’ for the purposes of section 75 unless other conditions are met (as described in paragraph 34).
    5. The de minimis restructuring test does not require the section 75 liabilities to be calculated. Therefore, unlike the other mechanisms for scheme departure, the test does not take into account the proportion of any orphan liabilities for which the departing employer might otherwise have been liable. These may form a significant part of overall liabilities, and could increase the amount of the section 75 debt which would otherwise have been payable to the scheme by the departing employer. The arrangement will mean that this debt will not trigger, so trustees should assess any impact of the arrangement on the security of members’ benefits. If they believe the use of the de minimis mechanism will have adverse effects on the scheme overall, they should consider whether it would be appropriate to negotiate with the employers involved for an appropriate level of mitigation to be provided to the scheme (such as additional contributions or contingent assets – see our guidance on assessing and monitoring the employer covenant).
    6. In addition, unlike the other mechanisms, the de minimis restructuring test does not consider the financial strength of the departing employer and any consequential reduction in the overall employer covenant. The scheme may be left at risk if significant orphan liabilities are left behind, or where the departing employer was financially strong but departed the scheme, reducing the overall employer covenant, without adequate mitigation being provided.

    Footnotes for this section

    • [22] Regulation 6ZC of the Employer Debt Regulations.
    • [23] Regulation 6ZD of the Employer Debt Regulations.

    The restructuring test

    1. If an employer departs from a scheme using this mechanism it will not be classed as an employment-cessation event and the employer leaves the scheme without a section 75 debt triggering.
    2. Where a corporate restructuring is due to take place, which involves one departing employer and one receiving employer, the employer who intends to depart from the scheme can write to the trustees to ask them to assess whether they are satisfied that, after the proposed restructuring has taken place, the receiving employer will be at least as likely:
      • as the departing employer to meet all of the departing employer’s liabilities in relation to the scheme; and
      • to meet the receiving employer’s own liabilities in relation to the scheme which existed immediately prior to the restructuring.
    3. Both the departing employer and receiving employer must employ at least one active member accruing defined benefits in the scheme. The receiving employer must either be associated with, or be the new legal status of the departing employer. Neither employer can have undergone an insolvency event. In the case of the receiving employer all these conditions must be met on the date of the restructuring.
    4. One of the factors that trustees must take into account when making the assessment is whether the arrangement will result in any material change that would justify a change to the methods or assumptions used in the last calculation of the scheme’s technical provisions; a change in the trustees' assessment of the employer covenant strength may justify a change in relevant assumptions. The relevant assumptions are described in the Scheme Funding Regulations[24].
    5. For the purpose of this guidance this assessment is known as the ‘restructuring test’[25].
    6. The trustees may request any information from the departing employer or receiving employer which the trustees are satisfied is necessary to assess the restructuring test, and the employers must provide it. The trustees should consult the employers about their decision.
    7. If the trustees, having received the necessary information from the departing employer and receiving employer, and having taken independent professional advice as appropriate, are satisfied that the restructuring test has been met, they must confirm this in writing, with reasons, to those employers.
    8. Trustees may decide that any costs incurred by them as a result of an employer departure using the restructuring test are to be met by the departing employer or the receiving employer, or both[26].
    9. If the departing employer transfers responsibility for all of its assets, employees, scheme members, and liabilities in relation to the pension scheme, to the receiving employer, within the timescales set out in the Employer debt regulations, and the employers provide written confirmation to the trustees of the date when this transfer is carried out, then the departure will not be an employment-cessation event and no section 75 debt will be triggered. When this has occurred and all relevant conditions are met, the departing employer will cease to be an ‘employer’ for the purposes of section 75 (but see paragraph 164).

    Key considerations

    1. This mechanism is only available in relation to employer departures that would otherwise be employment-cessation events, and which are ‘one-to-one’ restructures involving a transfer of assets, employers, scheme members and pension liabilities, between one departing employer and one receiving employer, neither of whom have had an insolvency event. However, it can also apply to a single employer that seeks to change its legal status (in which case the receiving employer is the entity with the new status).
    2. Although this mechanism only applies to restructurings involving transfers of assets and liabilities from one employer to another, trustees should be aware that such corporate activity rarely occurs in isolation. Such arrangements are usually part of a more complex restructuring plan for a group of companies which may also involve group businesses being divided up and/or sold. Restructuring may also involve the group purchasing other companies, businesses and/or assets from third parties in order to integrate them into existing operations. Trustees therefore need to be fully alert to the wider context in which the restructuring is taking place and the implications of this for the scheme.
    3. The receiving employer may be either a new employer created for the purpose of the restructuring, or an existing company, which may or may not have participated in the scheme before the restructuring.
    4. If the receiving employer was already a participating employer before the restructure, it may already have its own liability to the scheme in respect of its own employees in addition to those of the departing employer. It is important that trustees take this into account when considering whether the restructuring test is met.
    5. In order to carry out the restructuring test the trustees will have to compare the current overall employer covenant with the employer covenant after the restructuring. The trustees should establish the strength of the receiving employer’s covenant and the financial support that employer will offer the scheme after the restructuring. The trustees should consider how any existing assets and liabilities will be integrated with those the receiving employer assumes from the departing employer, how any security or charges are likely to affect assets in the receiving employer, the receiving employer’s position in the group structure and what advantages the restructuring actually offers. Understanding this and the business rationale for the restructuring should assist the trustees in reaching a view on the restructuring test and the short, medium and long-term implications for the scheme.
    6. The trustees should establish whether the receiving employer will take responsibility for only the assets and liabilities of the departing employer, or whether there are plans for it to acquire other assets or liabilities (either from within the group or purchased from a third party) and how that might affect the strength of the covenant.
    7. The pension liabilities for which responsibility must be transferred to the receiving employer from the departing employer are wide-ranging and include the departing employer’s share of the scheme’s orphan liabilities (part of its ‘liability share’).
    8. The restructuring test involves a strict process and it is important that all of the steps set out in the legislation are properly followed and completed. If, within 6 years of the restructuring transfer, it becomes apparent that certain key steps were not completed properly or on time, or that the employers failed to provide complete and correct information to the trustees, the restructuring will not be effective. This means that a section 75 debt will have been triggered at the point when the departing employer ceases to employ any active members, and the departing employer will remain an ‘employer’ for the purposes of section 75 unless other conditions are met (as described in paragraph 34).
    9. The restructuring transfer must be completed within 18 weeks of the trustees’ written decision that the restructuring test is met, unless the trustees decide that a longer period (up to 36 weeks) is appropriate.
    10. Trustees should consider whether relevant circumstances might alter in a material way during the period, especially if they are asked to agree a longer period. It would not be uncommon for the employer covenant to change in a material way over an 18-week period, for example if other corporate transactions occur during this time. The trustees should satisfy themselves that by the time the transfer actually takes place there has been no change that would alter their opinion that the restructuring test has been met. Trustees should decide early in the process how they will satisfy themselves of this, and whether it would be appropriate to agree any additional conditions with the employers. It will generally be in the interests of all parties to complete the process as quickly as reasonably possible, rather than treating the maximum permissible timescale as the default.

    Footnotes for this section

    • [24] Regulation 5(4)(d) of the Employer Debt Regulations.
    • [25] Regulation 6ZB of the Employer Debt Regulations.
    • [26] Regulation 6ZD of the Employer Debt Regulations.

    Scheme apportionment arrangements

    1. A scheme apportionment arrangement[27] takes effect when an employment-cessation event occurs or, if later, when the arrangement is agreed.
    2. A scheme apportionment arrangement modifies the amount of the departing employer’s section 75 debt so that it is greater or less than the liability share. If it is less, then all or part of the difference is apportioned to one or more of the remaining employers. The amount paid by the departing employer is known as the ‘scheme apportionment arrangement share’.
    3. A scheme apportionment arrangement must be agreed by the trustees as well as by any employers whose liabilities increase as a result of the arrangement.
    4. The trustees must be satisfied that the funding test for scheme apportionment arrangements is met.
    5. In order to undertake a scheme apportionment arrangement the scheme’s rules must provide for the departing employer’s share of the deficit to be modified by apportionment. The scheme apportionment arrangement must:
      • allow the departing employer to pay a specified amount that is different from their liability share
      • where this is less than the departing employer’s liability share, apportion all or part of the difference to one or more of the remaining employers (it may also specify when the apportioned amount is to be paid).
    6. A scheme apportionment arrangement can be entered into before, on or after the triggering of the section 75 debt. However, parties should note that the decision to enter into a retrospective apportionment (taking place after the event which has triggered the section 75 debt) a notifiable event (refer to our code of practice on notifiable events).

    Funding test – scheme apportionment arrangement

    1. Except in two circumstances (see paragraph 176 below), before entering into a scheme apportionment arrangement the trustees must be reasonably satisfied that both parts of the funding test are met:
      • When the arrangement takes effect the remaining employers will be reasonably likely to be able to fund the scheme, so that it will have sufficient and appropriate assets to cover its technical provisions (taking into account any changes to the technical provisions that may need to be made as a result of the scheme apportionment arrangement, for example because of a consequential reduction in covenant strength)[28].
      • The effect of the arrangement will not adversely affect the security of members’ benefits as a result of any:
        • material change in legal, demographic or economic circumstances, as described in the Scheme Funding Regulations[29], that would justify a change in the methods or assumptions used in the last calculation of the scheme’s technical provisions (a change in the trustees' assessment of the employer covenant strength may justify a change in relevant assumptions); or
        • material revision to any existing recovery plan (for example a longer recovery period).
    2. If the trustees have not received the scheme’s first actuarial valuation under the 2004 Act[30], then the funding test differs[31].
    3. When assessing the funding test we would expect trustees to assess the effect of the scheme apportionment arrangement on the scheme’s technical provisions, taking into account those factors set out in our code of practice on scheme funding.
    4. There are two circumstances where the trustees are not required to consider whether the funding test is satisfied:
      • where the amount to be paid by the departing employer is greater than its liability share and the trustees are satisfied that the departing employer can make this payment; or
      • when the scheme has commenced winding-up, but is not in a PPF assessment period and is unlikely to enter one in the next 12 months, and the trustees are satisfied that:
        • it is likely that the departing employer is not able to pay its liability share but can pay the scheme apportionment arrangement share; and
        • it is likely that the remaining employers (excluding defined contribution only employers) will be able to pay the difference.

    Consents required

    1. In order to enter into a scheme apportionment arrangement, the following consents must be obtained:
      • the consent of the trustees
      • where the departing employer is paying less than its liability share, the consent of the remaining employers to whom the remainder of the liability share is being apportioned
      • the consent of the departing employer if it is paying not less than its liability share.

    Key considerations

    1. Before agreeing to a scheme apportionment arrangement, the trustees must be satisfied that the arrangement is consistent with the interests of the scheme members. Even if a scheme apportionment arrangement is possible, it might still be inappropriate to proceed if trustees are not satisfied that, in the circumstances, it is in the members’ best interests. If this is the case trustees should consider whether any other mitigation should be put in place (such as contingent assets).
    2. There will be other relevant factors for trustees to consider before agreeing to a scheme apportionment arrangement, for example, whether the departing employer is paying an amount on departure and if so how much, and the financial strength of the employer(s) to whom the balance of the departing employer’s liability share is being apportioned, and whether that apportioned amount is to be paid at a specified time.
    3. Further considerations relating to scheme-apportionment arrangements are included in the regulator's clearance guidance.

    Footnotes for this section

    • [27] Regulation 6B of the Employer Debt Regulations.
    • [28] Note: The trustees may consider that this is met by reference to the remaining employers’ ability to meet the schedule of contribution payments (existing or revised because of the arrangement). See regulation 2(4C) of the Employer Debt Regulations.
    • [29] Regulation 5(4)(D) of the Employer Debt Regulations.
    • [30] Sections 221–233.
    • [31] Regulation 2(4B) of the Employer Debt Regulations.

    Withdrawal arrangements

    1. A withdrawal arrangement[32] is an arrangement by which the departing employer can pay an amount that is less than its liability share, but at least as much as its share of the deficit calculated on the technical provisions basis. The amount paid by the departing employer is known as the ‘withdrawal arrangement share’. One or more guarantors guarantee to pay the balance, which is known as ‘amount B’. Amount B can be a fixed or floating liability[33].
    2. Amount B is payable by the guarantors on the commencement of scheme wind-up, the insolvency of the last remaining employer or when agreed by the guarantors and the trustees.
    3. Trustees must only agree to a withdrawal arrangement if they are satisfied that:
      • at the date of the agreement the guarantors have sufficient financial resources to be likely to be able to pay amount B that would arise on that date, or the likely amount B; and
      • the funding test for withdrawal arrangements is met (see paragraphs 188 - 189).
    4. The arrangement can be entered into before, on or after an employment-cessation event.
    5. Withdrawal arrangements which do not require regulatory approval must contain a number of statutory conditions. Care should be taken by all parties (supported by relevant independent professional advice) to ensure that the statutory conditions are fully included. Failure to do so will mean that the withdrawal arrangement does not comply with legislation, and as such the departing employer may retain liability for the remainder of its section 75 debt calculated on the original liability share basis and would also remain an employer for the purposes of section 75 unless other conditions are met (as described in paragraph 34).
    6. Trustees may negotiate the inclusion of additional conditions, over and above the statutory conditions, where appropriate.
    7. The employer requirements in relation to notifiable events are extended to guarantors where a withdrawal arrangement is in place.

    Funding test – withdrawal arrangement

    1. The funding test will be met if the trustees are reasonably satisfied that, when the arrangement takes effect, the remaining employers will be reasonably likely to be able to fund the scheme so that it will have sufficient and appropriate assets to cover its technical provisions (taking into account any changes to the technical provisions that may need to be made as a result of the withdrawal arrangement, for example because of a consequential reduction in employer covenant).
    2. When assessing the funding test we would expect trustees to assess the effect of the withdrawal arrangement on the scheme’s technical provisions, taking into account those factors set out in our code of practice on scheme funding.

    Key considerations

    1. Trustees will want to satisfy themselves of the strength of the guarantee. Relevant factors may include:
      • the choice of guarantor including its financial strength, and (for example) whether it is an existing employer in relation to the scheme or has provided other guarantees, in which case the advantages of the guarantee may be reduced
      • whether amount B is a fixed amount or a floating liability
      • the agreed payment dates for amount B (for example earlier payment may be appropriate if amount B is fixed, to address the risk that the fixed amount will not cover the relevant liabilities)
      • any payments on account of amount B
      • whether the guarantee is properly enforceable
      • whether there should be more than 1 guarantor, and if so whether they are jointly and/or severally liable for amount B.
    2. Trustees should be cautious about agreeing to the departing employer’s withdrawal arrangement share being paid in instalments rather than immediately, as this is a risk to the scheme. The regulator would expect trustees to consider whether payment by instalments is appropriate or necessary. The trustees need to assess this risk including, among other things, the ongoing viability of the departing employer and whether it would be able to meet the payments as they fall due. Trustees should consider whether a guarantee or security should be provided for the instalment plan and whether interest should be an additional feature of a plan. If the departing employer cannot or does not pay the withdrawal arrangement share then a withdrawal arrangement is not the appropriate mechanism to use.
    3. It is important that trustees regularly monitor the strength of the guarantor, as they would any sponsoring employer. Should the trustees become aware that the strength of the guarantor has weakened since the withdrawal arrangement was put in place, they should take steps to address the impact of this, just as they would if another sponsoring employer showed a weakening covenant.
    4. A 'relevant transfer deduction' may reduce the withdrawal arrangement share if liabilities that are attributable to the departing employer and corresponding assets are transferred out of the scheme within 12 months after that employer's employment-cessation event. Certain details about the transfer and relevant transfer deduction must be included in the arrangement.
    5. Further considerations relating to withdrawal arrangements are included in the regulator's clearance guidance.

    Footnotes for this section

    • [32] Regulation 6C of the Employer Debt Regulations
    • [33] Paragraph 5 of Schedule 1A to the Employer Debt Regulations

    Approved withdrawal arrangements

    1. An approved withdrawal arrangement[34] is a withdrawal arrangement where the departing employer pays less than its share of the deficit calculated on the technical provisions basis on departing the scheme (whereas under a withdrawal arrangement the share paid by the departing employer must not be less than its share of the deficit calculated on a technical provisions basis).
    2. Where trustees consider that an approved withdrawal arrangement is appropriate, the employer must submit an application to the regulator for us to approve the arrangement. The application form to be completed can be downloaded from the regulator’s website.
    3. The trustees must be satisfied that the funding test (see paragraphs 188 - 189) is met.

    Key considerations

    1. The regulator can impose conditions over and above those set out in legislation, including where the result would be to arrive at an appropriate level of mitigation for the scheme. Which conditions might be appropriate will depend on the specific circumstances of the particular case.
    2. Certain details of any 'relevant transfer deduction' must be included in the arrangement. If the regulator approves the arrangement but the relevant liabilities are not transferred out of the scheme within 12 months (or any longer period approved by the regulator) after the departing employer's employment-cessation event, then the regulator's approval of the approved withdrawal arrangement will cease to be effective.
    3. Further considerations relating to approved withdrawal arrangements are included in the regulator's clearance guidance.

    Footnotes for this section

    • [34] Regulation 7 of the Employer Debt Regulations.

    Regulated apportionment arrangements

    1. A regulated apportionment arrangement[35] modifies the departing employer’s section 75 debt so that it is greater or less than its liability share. If it is less, then all or part of the difference is apportioned to one or more of the remaining employers.
    2. A regulated apportionment arrangement is only available where the scheme is in a PPF assessment period, or the trustees are of the opinion that the scheme is likely to enter a PPF assessment period within the next 12 months.
    3. To take effect the regulator must approve a regulated apportionment arrangement and the PPF must not object to it.
    4. We expect that the use of regulated apportionment arrangements will be very rare and only appropriate in exceptional circumstances.
    5. As this mechanism is only available in unusual circumstances, some of the general statements in this guidance may not apply to this mechanism.
    6. We expect that an application for approval of a regulated apportionment arrangement will be accompanied by a clearance application.
    7. Further information on regulated apportionment arrangements can be found in the regulator’s statement Regulated apportionment arrangements and employer insolvency.

    Footnotes for this section

    • [35] Regulation 7A of the Employer Debt Regulations.

    Broad characteristics of each statutory mechanism

    FAA SAA WA RT DMRT AWA RAA
    s75 debt still triggers cross / tick tick tick cross cross tick tick
    Can apply to employment cessation event (or where ECE would have occurred but for arrangement) tick tick tick tick tick tick tick
    Can apply on insolvency cross tick cross cross cross cross tick
    Can apply on scheme wind-up cross tick cross cross cross cross tick
    Employer ceases to be ’employer‘ for s75 purposes if all conditions are met tick tick tick tick tick tick tick
    Regulator approval required cross cross cross cross cross tick tick
    Guarantor required cross cross tick cross cross tick cross
    Trustee consent required tick tick tick tick tick tick tick
    Clearance available if a ‘type A event’ tick tick tick tick tick tick tick
    One-to-one restructures only cross cross cross tick tick cross cross
    Scheme must be likely to enter PPF assessment within 12 months or is in an assessment period cross cross cross cross cross cross tick

    Glossary of terms

    Covenant – an employer’s and other relevant parties’ legal obligations and ability to fund the scheme now and in the future. The strength of the covenant depends upon the robustness of the legal agreements in place and the likelihood that the employers and any other obligors (for example guarantors) can afford to meet them. As scheme sponsor, the employer underwrites the risks to which the scheme is exposed including underfunding, longevity, investment and inflation. The covenant needs to be adequate to offset a variety of different contingencies from short term (for example insolvency or employer departure) to long term (for example increasing longevity).

    Departing employer – an employer who is withdrawing from a scheme, including by way of employment-cessation event, an insolvency event, a de minimis restructuring arrangement, a restructuring arrangement or a flexible apportionment arrangement. The term is used in this guidance to include ‘cessation employer’ and ‘departing employer’ as defined in regulation 2(1) of the Employer Debt Regulations, ‘exiting employer’ as defined in regulation 2(3A) of the Employer Debt Regulations and and 'leaving employer' as defined in regulation 6E(7) of the Employer Debt Regulations.

    Departure – the act of an employer withdrawing from a scheme, including by way of employment-cessation event, an insolvency event, a de minimis restructuring arrangement or a restructuring arrangement.

    Employer – is, as the context requires, for the purpose of section 75 of the 1995 Act as defined in section 124(1) of that Act and as may be extended under section 125(3), including by regulations 9 and 13 of the Employer Debt Regulations in relation to former employers. ’Employer‘ is also used in this guidance, as the context requires, to refer to ’employers‘ for other purposes, as more fully described in paragraphs 22 and 23.

    Employment-cessation event – as defined in regulation 6ZA(1) of the Employer Debt Regulations and extended by regulation 9(4) in relation to frozen schemes.

    Liability proportion – K / L, where:

    • K equals the amount of a scheme's liabilities attributable to an employer in accordance with regulation 6(4) of the Employer debt regulations; and
    • L equals the total amount of the scheme's liabilities attributable to employment with the employers as defined in regulation 2(1) of the Employer Debt Regulations.

    Liability share – an amount equal to the liability proportion of the total difference between the value of the assets and the amount of the liabilities of the scheme, as defined in regulation 2(1) of the Employer Debt Regulations.

    Orphan liabilities – the total amount of a scheme’s liabilities which are not attributable to employment with any of the employers.

    Period of grace notice – a notice in writing that an employer intends during the period of grace to employ at least one person who will be an active member of the scheme as defined in regulation 6A(3) of the Employer Debt Regulations.

    PPF assessment period – the period after a qualifying insolvency event has occurred in relation to an employer of an eligible scheme, during which the PPF will assess whether or not it must assume responsibility for the scheme. See section 132 of the 2004 Act.

    Receiving employer – as defined in regulation 2(3A) of the Employer Debt Regulations.

    Replacement employer - as defined in regulation 6E(7) of the Employer Debt Regulations.

    Relevant members – those members who accrued defined benefits in the scheme as a result of pensionable service with the departing employer, as defined in regulation 6ZC(13) of the Employer Debt Regulations.

    Section 75 debt – the debt owed by an employer to the trustees of the scheme, calculated in accordance with section 75 of the 1995 Act.

    Section 75 deficit – the total amount by which a scheme’s liabilities on an annuity buy-out basis (annuities purchased from a regulated insurance company to secure the scheme’s liabilities in full) exceed the value of the scheme’s assets. This can also include specified estimated expenses.

    Segregated scheme – as defined in regulation 8(2) of the Employer Debt Regulations.

    Technical provisions – a calculation, set out in Part 3 of the 2004 Act and based on methods and assumptions usually agreed by the trustees and employer, of the amount needed at a particular time to make provision for the scheme’s liabilities.

    Relevant legislation

    • The Occupational Pension Schemes (Employer debt) Regulations 2005, as amended, referred to in this guidance as ‘Employer Debt Regulations’.

      This guidance relates to amendments to the employer debt regime introduced by the Occupational Pension Schemes (Employer debt and Miscellaneous Amendments) Regulations 2008 (SI 2008/731) from 6 April 2008 and then as subsequently amended by the Occupational Pension Schemes (Employer debt – Apportionment Arrangements) (Amendment) Regulations 2008 from 15 April 2008, the Occupational Pension Schemes (Employer debt and Miscellaneous Amendments) Regulations 2010 from 6 April 2010 and the Occupational Pension Schemes (Employer debt and Miscellaneous Amendments) Regulations 2011 from 27 January 2012.

    • The Pensions Act 2004, referred to in this guidance as the ‘2004 Act’.
    • The Pensions Act 1995, referred to in this guidance as the ‘1995 Act’.
    • The Occupational Pension Schemes (Scheme Funding) Regulations 2005, referred to in this guidance as the ‘Scheme Funding Regulations’.
    • The Occupational Pension Schemes (Scheme Administration) Regulations 1996, referred to in this guidance as the ‘Scheme Admin Regulations’.

    All legislation referred to in this guidance can be viewed at www.legislation.gov.uk.

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