The UK government has altered rules for multi-employer schemes to help sponsoring employers avoid crippling payments when they no longer have any staff participating in the arrangement.
Employer debt regulations for multi-employer defined benefit (DB) schemes will change from 6 April 2018.
After a consultation last year the Department for Work and Pensions (DWP) has decided to allow employers exiting multi-employer schemes more time in which to pay off liabilities under a deferred debt arrangement (DDA), provided certain conditions are met.
Under the Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2018, employers whose only change is to stop employing active members in a scheme will be allowed to retain an ongoing commitment to the scheme, making contributions on an ongoing basis rather than be forced into a one-off cessation payment, known as Section 75 debt.
The current rules were introduced in 2005 to prevent companies walking away from the pension liabilities of subsidiaries that had become insolvent.
However, cessation payments are often unaffordable and have led to a number of insolvencies. In some cases, organisations have remained trapped in a scheme, forced to fund liabilities which are continually rising.
Multi-employer schemes are used by many small businesses and other organisations too small to run their own DB scheme, and are dominated by the charity sector. They also include some of the UK’s biggest pension funds, such as the Universities Superannuation Scheme and RPMI Railpen.
From April and within the DDA, employers would continue to bear all the same funding and administration obligations to the scheme as was the case before making the agreement, in order to protect member benefits and other employers.
David Davison, head of charity practice at actuaries Spence & Partners, said: “This is a huge step forward, offering companies, charities and other entities significant additional flexibility in controlling risk in an affordable way, while focusing resources on paying down liabilities already built up, rather than building further amounts.
“My only minor concern is whether pension schemes will embrace these proposals and find ways to make them workable.”
The plight of small companies was raised in the UK parliament’s lower chamber (House of Commons) last year, when Scottish MP Kirstene Hair warned that some company owners in the Plumbing and Mechanical Services Industry Pension Scheme were unable to retire because this would trigger the debt payment, forcing them to close their business.
Davison expects the Scottish government to bring similar legislation for the LGPS – which is governed by different rules – into effect in Scotland by June this year, with England and Wales following later.