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03rd May 2017

Charities welcome consultation on deferred pension debt arrangements

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In response to its call for evidence on employer debt regime discussed here, the DWP has published draft regulations which, if implemented, will introduce a new ‘deferred debt arrangement’.
This change was sought by the Charity Finance Group to help charities in industry-wide pension schemes where participating employers are not part of the same group, as such charities cannot always pay employer debts that are triggered upfront or apportion the debt to another employer in the scheme.

The intention is for the new mechanism to enable employers in multi-employer schemes to defer the requirement to pay an employer debt on ceasing to employ any active members. The deferred employer will continue to be an employer for scheme funding purposes and may be required to make deficit recovery payments to meet any shortfall on an ongoing basis.

To use a deferred debt arrangement, a number of preconditions must be satisfied. In particular, that

  • the funding test is met;

  • the trustees give their written consent to the arrangement; and

  • the scheme is not being assessed for entry to the Pension Protection Fund or likely to begin such an assessment in the next 12 months.

Broadly, to meet the funding test, the trustees must be reasonably satisfied that the scheme employers (including the deferred employer) will be reasonably likely to be able to fund the scheme going forwards and that the effect of the deferred debt arrangement will not be to adversely affect the security of members’ benefits.

A deferred debt arrangement will come to an end if:

  • the deferred employer employs an active member of the scheme;
  • the deferred employer, with the consent of the trustees, triggers the debt;
  • an insolvency event occurs in relation to the deferred employer;
  • the scheme winds-up;
  • the deferred employer restructures;
  • a freezing event occurs in relation to the scheme;
  • the trustees decide that the deferred employer has not complied with its scheme funding obligations and they serve notice on the deferred employer ending the arrangement; or
  • the trustees decide that the deferred employer’s covenant to the scheme is likely to weaken in the next twelve months and they serve notice on the deferred employer ending the arrangement.
As the deferred debt arrangement is not open to employers that are restructuring, existing easements and apportionment mechanisms will still be used in such cases. The wording in the ‘restructuring’ easement has been clarified to confirm that it can be used to prevent a debt triggering where an unincorporated charity incorporates as a charitable incorporated association or a charitable company.

The consultation is open until 18 May. Whether the regulations come into force will depend on the policies adopted by the next government. If you have any questions about the employer debt regime, please contact Christopher Nuttall on 01604 463134 or click here to email Chris. For more information on our pension services please click here.