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

1. (Nearly) everything you ever wanted to know about employer debt… Kris Weber, March 2013

2. 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. Disclaimer (well we are lawyers…!)

3. 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 What are we going to talk about?

4. 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. The purpose of the employer debt regime

5. 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 A short history of employer debt

6. 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 A short history of employer debt (2)

7. 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) The 2008 regime

8. 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. The 2008 regime (2)

9. “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” Calculating an employer’s debt

10. Withdrawal Arrangements Approved Withdrawal Arrangements Regulated Apportionment Arrangements Scheme Apportionment Arrangements Flexible Apportionment Arrangements Employer debt workarounds

11. 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 (1) Withdrawal Arrangements

12. 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…” Funding test

13. 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 (2) Approved Withdrawal Arrangements

14. 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 (3) Regulated Apportionment Arrangements

15. 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 (4) Scheme Apportionment Arrangements

16. 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…” Funding test

17. 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 (5) Flexible Apportionment Arrangements

18. (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 satisfiedthat it will not enter one within next 12 months); scheme must not be in wind-up. Characteristics of workaround mechanisms

19. Impact on PPF eligibility “Former employers” Frozen schemes Sectionalised schemes Trustees’ fiduciary duties Other bits ‘n’ bobs

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