UK News

Section 75 Pensions Act 1995 and the New Deferred Debt Arrangements

November 2018

Background

Section 75 and 75A Pensions Act 1995, as amended by Employer Debt Regulations, provides that an annuity buy-out debt is triggered on an employer of a defined benefit scheme in certain circumstances. These include:

  1.  Where the employer triggers a winding up of the scheme
  2.  The employer becomes insolvent 
  3.  Where the employer leaves a multi-employer scheme, and 
  4.  When a participating employer stopped employing any active employees in the pension scheme

New Employer Debt Regulations

With effect from 6th April 2018, a deferred debt arrangement (DDA) was introduced to provide relief where a participating employer ceases to employ any active member. The deferred debt arrangement allows, if certain conditions are met, for the section 75 debt to be avoided should an employer cease to employ active members. This can arise through matters outside the control of the employer, such as the death of the last employee or an unexpected resignation. Instead of triggering the debt, the employer can continue funding the scheme on an ongoing basis instead. A DDA can be used by multi-employer schemes which only have non- associated employers. This is a step forward from flexible apportionment arrangements which usually require employers to be connected.

Is a deferred debt arrangement a good idea?

There are gateway conditions which need to be satisfied to enter into a DDA. They are:

  • An employment cessation event has occurred, or would have occurred, if the employer had not entered into, and remained in, a grace period until immediately before the date on which the deferred debt arrangement takes effect
  • The trustees are satisfied at the commencement of the deferral that the employer’s covenant is not likely to weaken for 12 months following the deferral commencement
  • The scheme is not in a Pension Protection Fund assessment period, or being wound up, and assessment period is unlikely in the next 12 months

The deferral period can be ended by the trustees thereby triggering the section 75 debt where:

  • The trustees are reasonably satisfied the employer’s covenant is likely to weaken materially within 12 months
  • Trustees and the employer can agree the deferral period is to be terminated on the basis an employment cessation event is to be regarded as having occurred
  • The trustees have to monitor the employer’s covenant on an ongoing basis

However a deferred debt arrangement may not be a solution as there is a sting in the tail. The trustee can end such an arrangement unilaterally and trigger a section 75 debt on the employer. This is not an entirely satisfactory situation for the employer.

Is there a better alternative?

A flexible apportionment arrangement may well be a better alternative to a deferred debt arrangement where there is a multi- employer scheme with two or more connected employers and where a connected employer is a suitable candidate to take over the obligations of its related company. Under a flexible apportionment arrangement, another company in the group has the existing participating employer’s pension liability apportioned to it with the result that the original company can exit the scheme without any section 75 debt and no longer has any obligation to the scheme. This will not be of use where there is no other employer to receive the outgoing company’s pension obligations which has a strong enough covenant to be acceptable to the trustees of the scheme.

Reporting to the Pensions Regulator

Scheme trustees must notify the Pensions Regulator as soon as reasonably practicable after a DDA starts or comes to an end.

Conclusion

A DDA may be useful in a given set of circumstances and at least gives the employer a way of avoiding a section 75 debt subject to co-operation from the trustees. So DDAs should be seen in a positive light. There will be regular statutory reviews by the Secretary of State for Work and Pensions, although the first review setting out the review’s conclusions only needs to be published by 6th April 2023. Subsequent reports will then be at no more than 5 yearly intervals.