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23rd April 2015

DWP call for evidence on pension debts

As discussed here, a joint working group from the DWP and the Charity Finance Group have reviewed issues around pension shortfalls and the employer debt regime.

As discussed here, a joint working group from the DWP and the Charity Finance Group have reviewed issues around pension shortfalls and the employer debt regime. To assess the possible impact of changes sought by the charities sector, the DWP has issued a call for evidence.

The employer debt regime

Where a defined benefit pension scheme winds up or its sponsoring employer becomes insolvent, the employer is required to pay off its share of any shortfall in its liabilities to the scheme at the buy-out price (the cost of buying annuities to cover all of that employer’s liabilities in the scheme). In a multi-employer scheme, this ‘debt’ is also triggered if an employer stops employing active members in the scheme (at a time when at least one other employer continues to do so).

Mechanisms are already available that allow a departing employer to apportion its debt among the remaining employers in the scheme (with their agreement). The suggested changes are aimed at non-associated multi-employer schemes. These are schemes in which the participating employers are not connected with each other by being part of the same group of companies. They are often industry-wide schemes. An employer in such a scheme is unlikely to be willing have the liabilities of an unconnected employer apportioned to it, and so the existing mechanisms are of limited use.

The suggested changes:

  • Make debt repayments more flexible so that, rather than the debt being called in up-front, a solvent employer could negotiate a longer-term debt repayment plan with the trustees.
  • Amend the law so that a solvent employer stopping employing active members would not automatically trigger the debt but instead the employer could trigger the debt on notice or the trustees could trigger it if, for example, the employer covenant deteriorated.
  • Calculate the liabilities of the scheme using something other than the buy-out price so that a smaller debt becomes due.

The call for evidence is open until 22 May and so whether any of the changes are adopted 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.

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