If your charity is part of a non-associated multi-employer pension scheme you will be pleased - and relieved - to know that there has been some progress in reforming Section 75 employer debt. You may remember that the DWP published its consultation on S75 back in Spring 2015. After 2 years and continuous pressure from CFG, our members and corporate partners, the government has responded and the DWP managed to push out its response ahead of the election.
This blog post takes you through the proposals, what issues may need to be addressed and how you can feed into the consultation.
What was the problem?
Put simply, non -associated multi employer pensions schemes include more than one employer that are unrelated (so not owned in common, or under common control) where employees are promised a specific monthly basis on retirement. If an employer in the scheme closes without being able to fully meet their pension liabilities, an ‘orphan debt’ is left behind and redistributed among the remaining employers in the scheme.
This means that charities in multi-employer DB schemes have found themselves dealing with the impact of the financial crisis and the ensuing economic challenges as well as the additional burden of orphan debt. As such, charities have found themselves in a situation where they are building up deficits that they cannot afford to repay.
However, where charities in stand alone schemes might chose to close the scheme to future accrual, the Section 75 rules prohibit those in multi-employer schemes from doing so. This is because if charities want to leave a multi-employer scheme to stop accruing liabilities they need to immediately pay the section 75 ‘cessation’ debt. This debt is calculated on the basis of buying an annuity for some members. This is often far larger than the costs of the scheme on an ongoing basis.
This means that charities face an impossible situation: continue to accrue a deficit that they cannot afford to pay, or trigger a cessation debt that they can equally not afford to pay.
What do the regulations propose?
The DWP have put forward proposed regulations that would give pension trustees the option to defer the employer debt triggered when an employer ceases to employ an active scheme member. This is called the Deferred Debt Arrangement (DDA).
I.e. if a charity had one employer left in the multi-employer scheme and they retire, instead of having to pay an employer debt under Section 75 rules, the charity could have the option to defer paying that debt.
In theory the DDA should free charities from the current catch 22 where they can neither afford to exit a multi-employer scheme, nor to remain in the scheme.
Are there any issues that need to be addressed?
These regulations are by no means perfect. For those of you that have been following the 'Non-Associated Multi Employer Scheme saga', you'll know that there have been a number of 'fixes' put in place to address the challenges over the years. E.g. the 'period of grace' where an employer has up to three years to employ a new active member in 'the scheme.
In this way, the DDA can be viewed as simply another tinkering with the edges of multi-employer schemes rather than reforming them significantly.
There are 4 key issues that need to be addressed:
- The DDA does not remove the employer debt, it simply defers it. There have been calls by pensions experts such as the ex-pensions Minister, Ros Altmann, to remove the need for a full buyout and simply ensure that the technical provisions will be paid.
- Employers will not be able to take advantage of the DDA if they are restructuring or merging. The assumption made in the consultation is that restructures and mergers automatically weaken the employer covenant. It certainly isn't clear that this is the case and CFG will be challenging the DWP on this in our consultation response.
- The power is in the hands of the trustees. Whilst these regulations are a significant step forward, they do not mean that pension trustees should use them. CFG will be calling for the DWP to ensure pension trustees are aware of the DDA and it's benefits, and ensure that the right training and advice is in place.
- Related to point 3, the DDA should be the default option with Section 75 as the last resort. Essentially, S75 force charities (or any employer) to pay a cessation debt that they cannot afford, or to stay in the scheme which is equally unaffordable. This is more likely to lead to forced closures which will ultimately lead to a situation where the promises made to members of the scheme go unmet. By choosing DDA and allowing employers to exit more flexibly by default, pension trustees could avoid this situation.
How can you get your voice heard?
The consultation document can be read on the DWP website - this provides information on how you can respond to the consultation on behalf of your charity.
CFG will be submitting a consultation response and we will be holding an emergency pensions forum to discuss the regulations. This will inform our consultation. Please email email@example.com if you are interested in attending this forum.
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