Employer Debt Regulations - Part 2

Employer Debt Regulations – Part 2
Following on from Part 1 of this Bulletin, issued earlier this month, which looked at some aspects of the Employer Debt Regulations 2008 [1] (the "2008 Regulations"), we continue our high level review of the key provisions (now in force as of 6 April 2008) by considering the following aspects of the new legislation:

• New arrangements for apportionment of debt;
• New types of withdrawal agreement; and
• Transitional arrangements.

The implications of these changes for particular schemes are, however, complex and specific advice should be taken before acting on the new 2008 Regulations.

Apportionment of debt
Apportionment involves exercising power under scheme rules, when an employer withdraws from a scheme, to share that employer's exit debt amongst the remaining employers, usually to be payable only when those remaining employers withdraw from the scheme. This allows the withdrawing employer to leave on a reduced/zero debt basis.

The 2008 Regulations amend the law on apportionment, to reduce the likelihood of scheme abandonment, so that (subject to certain exemptions) apportionment can only take place in line with the scheme rules provided the Funding Test has been met. For the Funding Test to be met, (in addition to other factors) the trustees must be satisfied that the remaining employers will be reasonably likely to be able to fund the scheme to the scheme funding level.

Regulated apportionment arrangements have also been introduced to apply where the scheme is in a Pension Protection Fund assessment period or the trustees believe the scheme is likely to enter an assessment period within 12 months.

Withdrawal Arrangements
By way of reminder, a Withdrawal Arrangement (WA) permits an employer to withdraw from a scheme having paid less than its share of the employer debt (i.e. less than full buy-out level). The new regime under the 2008 Regulations provides for two types of WA, one of which does not require the Regulator's approval. The Regulator's test when approving withdrawal arrangements has also been amended.

A WA not requiring approval can proceed provided certain requirements are met:

• The exiting employer must pay at least an amount equivalent to its share of the deficit calculated on the scheme specific funding basis and a guarantor must guarantee to pay the difference between that and full buy-out costs.
• The trustees must be satisfied that the guarantor is able to meet the costs covered by the guarantee and also that the "Funding Test" is met.

A WA will require Regulator approval if the trustees agree that the withdrawing employer will pay less than scheme specific funding level. The DWP's explanatory notes accompanying the 2008 Regulations also indicate that where employers and trustees are unable to agree the terms of a withdrawal, the Regulator's approval will be required.

The previous test applied by the Regulator when approving WAs (i.e. that the Regulator needed to be satisfied that the employer debt was "more likely" to be paid) has, however, been removed and replaced with a more flexible approach.

We would anticipate that once the Regulator's full guidance materials on the new employer debt regime are published, we will gain a better understanding of how the Regulator will deal with WAs in practice. We will update you on any developments in this area, but at time of writing the Regulator has no definite timescale for publication of the guidance.

Transitional arrangements
Until 6 April 2009, there are certain circumstances in which an employer debt may be subject to the old regime in place prior to the 2008 Regulations coming into force. This may be the case where, for example, agreements have already been entered into or negotiations have already taken place.

Comment – impact of 2008 Regulations
The amendments introduced by the 2008 Regulations will be broadly welcomed by many within the pensions industry. Had all the original proposals in the consultation been included, it would have meant an employer debt would have been triggered when all employers in a multi-employer scheme ceased future accrual. Fortunately the 2008 Regulations did not include this trigger and it is clear that closing a multi-employer scheme to future accrual will not trigger an employment cessation event. Although there is undoubtedly more flexibility with the changes to apportionment and withdrawal arrangements, this does however remain an extremely complex area of the law.

[1]  The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendment) Regulations 2008

22/04/2008