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(Nearly) everything you ever wanted to know about employer debt…

Kris Weber, March 2013

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Disclaimer (well we are lawyers…!)

• This slideshow has been prepared as a general guide and does not constitute advice on any specific matter.

• We recommend you seek professional advice before taking any action on the basis of the material contained herein.

• We accept no liability for any action taken or not take as a result of this information.

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What are we going to talk about?

• Purpose of the employer debt regime

• A short history of employer debt Pension Schemes Act 1993 Pensions Act 1995 2003 to 2005: seminal times

• The 2008 regime When debts are triggered Employment-cessation events and periods of grace One-to-one restructurings Default means of calculating an employer’s debt

• Employer debt workarounds Withdrawal and Approved Withdrawal Arrangements Regulated Apportionment Arrangements Scheme Apportionment Arrangements Flexible Apportionment Arrangements

• Miscellaneous bits ’n’ bobs

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The purpose of the employer debt regime• To ensure that, if a pension scheme is wound up (or an employer becomes insolvent) at a time when the value of the assets of the scheme is less than the amount of the scheme’s liabilities, an amount equal to the difference is treated as a debt due from the employer.

• To ensure that the trustees of the pension scheme will rank as creditors in relation to any dividend paid out on the insolvency of the employer.

• To prevent an employer leaving a multi-employer scheme without meeting its share of the overall deficit in the scheme.

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A short history of employer debt• The position up until the early 1990s

No employer debt regime!

• 7 February 1994 : Pension Schemes Act 1993 section 144 Employer into liquidation = debt to scheme (GN19 basis)

• Pensions Act 1995 and the Minimum Funding Requirement Withdrawal debts from multi-employer schemes

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A short history of employer debt (2)

• 2003 to 2005: seminal times June 2003: solvent employer winds up scheme, buyout basis February 2005: insolvent employer winds up scheme, buyout basis April 2005: “insolvency event” includes administration / receiverships September 2005: multi-employer withdrawal debts, buyout basis

Date range Employer in administration

Employer insolvent liquidation

Employer in insolvent liquidation

Employer ceases participation

7.2.94 to 5.4.97 No debt GN19 GN19 No debt

6.4.97 to 10.6.03 No debt MFR MFR MFR

11.6.03 to 14.2.05 No debt Buyout MFR MFR

15.2.05 to 5.4.05 No debt Buyout Buyout MFR

6.4.05 to 1.9.05 Buyout Buyout Buyout MFR

2.9.05 onwards Buyout Buyout Buyout Buyout

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The 2008 regime• When will debts be triggered?

During a scheme wind-up When the sponsoring employer enters administration Other situations

• Multi-employer schemes: employment-cessation events Cease employing actives when at least one other employer still does

• Periods of grace Notice to trustees within two months after ECE occurs 12 month period of grace

(up to 36 months if trustees so agree within first 12 month period)

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The 2008 regime (2)• One-to-one restructurings: statutory easements

The ‘at least as likely’ easement– receiving employer ‘at least as likely’ to meet liabilities as exiting employer

The ‘de minimis’ easement– assets >= protected liabilities (s179 PA04)– no more than 2 affected members (or, if greater, 3% of DB membership)– accrued pensions not to exceed £20k p.a. in total– in past 3 years: 5 members / 7.5% of membership, pensions =< £50k p.a.

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Calculating an employer’s debt• “liability share” method

• K/L x D K = liabilities attributable to that employer L = liabilities attributable to all scheme employers D = entire buyout deficit in scheme

• Orphan liabilities attribute entire liability to members’ last employer attribute liability to/amongst any one/more scheme employers attribute liability to no employer

• Transferred-out liabilities “relevant transfer deduction”

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Employer debt workarounds• Withdrawal Arrangements

• Approved Withdrawal Arrangements

• Regulated Apportionment Arrangements

• Scheme Apportionment Arrangements

• Flexible Apportionment Arrangements

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(1) Withdrawal Arrangements

• Employer, trustees, guarantor

• Equal to / more than TP deficit

• Guarantor pays “Amount B” (wind-up, insolvency event, date agreed)

• WA share: lump sum / instalments

• Before, at same time as, after

• Fixed or floating basis

• Guarantor has sufficient resources

• First limb of funding test

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Funding test• 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 after the ECE it will have sufficient and appropriate assets to cover its technical provisions, taking account of any change in those provisions which will in the opinion of the trustees be necessary as a result of the arrangement”.• hello

Trustees may consider that funding test met “if in their opinion the remaining employers [or, as the case may be, those to whom the cessation employer’s liability share is being apportioned] are able to meet the relevant payments as they fall due under the schedule of contributions for the purposes of section 227 Pensions Act 2004, taking into account any revision of that schedule that they think will be necessary when the arrangement takes effect”.

• The trustees are “reasonably satisfied that the effect of the arrangement will not be to adversely affect the security for members’ benefits as a result of any (i) material change in legal, demographic or economic circumstances … that would justify a change to the methods or assumptions used on the last occasion on which the scheme’s technical provisions were calculated, or (ii) material revision to any existing recovery plan…”

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(2) Approved Withdrawal Arrangements

• Employer, trustees, guarantor

• Equal to / more than TP deficit

• Guarantor pays “Amount B” (wind-up, insolvency event, date agreed)

• WA share: lump sum / instalments

• Before, at same time as, after

• Fixed or floating basis

• Guarantor has sufficient resources

• First limb of funding test

• Employer, trustees, guarantor

• Lower than TP deficit

• Guarantor pays “Amount B” (wind-up, insolvency event, date agreed)

• AWA share: lump sum, instalments

• Before, at same time as, after

• Fixed or floating basis

• Approval from TPR

• First limb of funding test

• TPR conditions if approving AWA

• Suspension notice

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(3) Regulated Apportionment Arrangements

• Part of scheme rules

• Cessation employer liability share

• All / part of that amount

• Fixed basis only?

• Before, at same time as, after

• Reasonable likelihood of PPF assessment period

• Regulator must approve

• PPF must not object

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(4) Scheme Apportionment Arrangements

• Part of scheme rules

• Cessation employer liability share

• All / part of that amount

• Fixed basis only?

• Before, at same time as, after

• Reasonable likelihood of PPF assessment period

• Regulator must approve

• PPF must not object

• Part of scheme rules

• Cessation employer liability share

• All / part of that amount

• Floating basis only?

• Before, at same time as, after

• Both limbs of funding test

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Funding test• 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 after the ECE it will have sufficient and appropriate assets to cover its technical provisions, taking account of any change in those provisions which will in the opinion of the trustees be necessary as a result of the arrangement”.• hello

Trustees may consider that funding test met “if in their opinion the remaining employers [or, as the case may be, those to whom the cessation employer’s liability share is being apportioned] are able to meet the relevant payments as they fall due under the schedule of contributions for the purposes of section 227 Pensions Act 2004, taking into account any revision of that schedule that they think will be necessary when the arrangement takes effect”.

• The trustees are “reasonably satisfied that the effect of the arrangement will not be to adversely affect the security for members’ benefits as a result of any (i) material change in legal, demographic or economic circumstances … that would justify a change to the methods or assumptions used on the last occasion on which the scheme’s technical provisions were calculated, or (ii) material revision to any existing recovery plan…”

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(5) Flexible Apportionment Arrangements

• Part of scheme rules, or external

• Liabilities to be apportioned

• Floating basis only

• (Up to 28 days) before, at same time as, after

• No ECE or nil debt

• Approval of all employers involved

• Both limbs of funding test

• Not in period of grace

• Not in assessment period(or in wind-up)

• Nor is assessment period likely

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Characteristics of workaround mechanisms

Characteristic ALAL DEMIN WA AWA RAA SAA FAAMechanism usable on employer insolvency and/or scheme wind-up?

Neither Neither Neither Neither Both Both Neither

Must agreement be contained in, or outside, the scheme rules? Outside Outside Outside Outside In rules In rules EitherWhich employers must be party to the agreement? All All Cessation Cessation Receiving Receiving AllHow much of the technical provisions debt can be apportioned? All

liabilitiesAll liabilities

More than / equal to

Less than More than / less than

More than / less than

All or any liabilities

Is TPR approval needed? No No No Yes Yes Non NoCan clearance from TPR be sought? Yes Yes Yes Yes Yes Yes YesIs PPF involvement necessary? No No No No Yes No NoAgreement can be entered into before / after ECE occurs? Before Before Either Either Either Either EitherCan apportionment be on a fixed basis? No No No No Yes Yes NoCan apportionment be on a floating basis? Yes Yes Yes Yes [No] [No] YesIs a guarantor required? No No Yes Yes No No NoMust the trustees be satisfied as to its ability to pay? n/a n/a Yes No n/a n/a n/aMust first limb of funding test be met? No No Yes Yes No Yes YesMust second limb of funding test be met? No No No No No Yes YesIs a section 75 debt triggered? No No Yes Yes Yes Yes No / YesCan the section 75 debt be held in abeyance? n/a n/a No Yes No No n/a / YesIs cessation employer able to pay its dues in instalments? No No Yes Yes No No NoWill cessation employer cease to be ‘employer’ for s75 purposes? Yes Yes Yes Yes Yes Yes YesAny other conditions? Yes(1) Yes(1) No No Yes(2) No Yes(3)

(1) Strict procedural steps set out in Employer Debt Regs.(2) Must be ‘reasonable likelihood’ of scheme entering PPF assessment period within next 12 months.(3) Cessation employer must not be in period of grace; scheme must not be in PPF assessment period

(and trustees must be satisfied that it will not enter one within next 12 months); scheme must not be in wind-up.

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Other bits ‘n’ bobs• Impact on PPF eligibility

• “Former employers”

• Frozen schemes

• Sectionalised schemes

• Trustees’ fiduciary duties

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