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          Deferred Debt Arrangements – the proposed new section 75 debt deferment mechanism

          The DWP has proposed a new approach for postponing employer debts in multi-employer schemes for non-associated employers, but will the new "deferred debt arrangement" give sufficient relief?

          Date: 09/05/2017

          The latest round of consultation has been issued by the DWP in relation to the matter of finding a fairer way to deal with employer debts in multi-employer schemes for non-associated employers.

          As expected the consultation notes that the majority of respondents had experience in the charitable sector as many charities participate in pension schemes with this structure and therefore  tend to be particularly impacted by the issues associated with the structure of these schemes. 

          The Deferred Debt Arrangement

          It is proposed that a deferred debt arrangement is introduced which would allow an employer who no longer has any active members in a scheme open to accrual to continue to participate in the scheme. It is proposed that participation would be on an ongoing funding basis rather than having to pay a section 75 debt and exit the scheme at that point.

          Under the proposals, the conditions that will require to be fulfilled for an employer to be able to enter into a deferred debt arrangement are that:

          • A funding test must be met;
          • The trustees/manager of the scheme must give consent to the arrangement in writing "based on their satisfaction that the arrangement would not be detrimental to the scheme or its members"; and
          • The Scheme must not be in a PPF assessment period or be likely to commence such a period in the next 12 months.

          The proposed arrangement will not be available to employers who are restructuring, but will be available to employers who are currently in a period of grace who can enter into a deferred debt arrangement during that period of grace which will come into effect at the end of the period of grace.

          It is proposed that entering into a deferred debt arrangement will also require to be notified to the Pensions Regulator by the trustees/managers.

          During the Deferred Debt Arrangement

          During the arrangement it is purported the employer will be treated as an employer for the purposes of scheme funding and may as a result be required to make deficit recovery contributions if required.

          Ending the Deferred Debt Arrangement

          The arrangement as proposed will come to an end in a number of ways, which could result in a debt becoming due from the employer:

          • The employer employs an active scheme member;
          • The employer chooses to trigger a section 75 debt;
          • The employer suffers an insolvency event or commences winding-up;
          • The scheme winds-up;
          • The deferred employer restructures; or
          • The scheme becomes the subject of certain freezing events.

          In addition, the trustees are to be able to serve notice bringing the arrangement to an end if they are of the opinion that the employer has not complied with its obligations in relation to scheme funding. The trustees are also to be obliged to monitor employer covenant and if an alteration in covenant means that the trustees decide that the arrangement is no longer in the interests of the scheme, they can decide to serve notice to terminate this.

          It is proposed that ending a deferred debt arrangement will also require to be notified to the Pensions Regulator by the trustees/managers.

          Orphan liabilities

          The consultation document confirms that the employer will remain responsible for a share of orphan liabilities, but notes that the position in relation to orphan liabilities in multi-employer schemes generally is being considered in the context of the Green Paper.

          Other Amendments

          Additional amendments to the employer debt regime proposed in the consultation paper include:

          An alteration to the definition of "receiving employer" to ensure that this includes a situation where an employer is changing status, from unincorporated charity to incorporated charity for example, so that the receiving employer can be the new legal status of the exiting employer.

          A new provision to clarify that an employer debt cannot be triggered more than once where an employer experiences two consecutive employment cessation events.

          An amendment to increase the time limit in which an employer must notify the trustees of its intention to enter into a period of grace from two months to three months.

          If you have any questions or would like further information about the consultation paper, please contact our pensions specialists.

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