Employers seeking to exit industry-wide schemes could be permitted to postpone so-called ‘section 75’ debt payments under draft rules from the UK’s Department for Work and Pensions (DWP).
In a consultation published on Friday, the DWP said companies should not have to pay all their obligations towards multi-employer schemes immediately when withdrawing. Currently, if a company seeks to exit a multi-employer scheme because it has no active members left, it must pay a lump sum to cover its remaining pensioner and deferred member liabilities.
This sum can also include contributions to other companies that previously left the scheme or went bust, known as ‘orphan liabilities’.
The rule affects some of the UK’s biggest pension funds, including the Universities Superannuation Scheme, RPMI Railpen, and the Merchant Navy Officers’ Pension Fund.
The DWP said: “The government proposes to introduce a new option for employers in multi-employer schemes to defer the requirement to pay an employer debt on ceasing to employ an active member. This deferred debt arrangement would be subject to a condition that the employer retains all their previous responsibilities to the scheme and continues to be treated as if they were the employer in relation to that scheme.”
The proposal was initially consulted on during the previous government in 2015.
Alistair Russell-Smith, scheme actuary at Hymans Robertson, said the proposals provided “much-needed relief” for employers, “many of whom allow further defined benefit risk and liability to build up so as not to trigger punitive exit debts”.
“This deferral is the easement we advocated when responding to the 2015 call for evidence and strikes a better balance between scheme security and employer sustainability than other options on the table such as weakening the basis of the exit debt,” Russell-Smith said. “However, employers do need to be aware that this is not a silver bullet for managing the cost and risk of multi-employer schemes. The lack of influence and certainty over future funding costs and the need to fund orphan liabilities both remain real concerns.”
Joe Dabrowski, head of investment and governance at the Pensions and Lifetime Savings Association, said the consultation was “vital”, as it affected some of the UK’s largest schemes as well as many charity pension funds.
“The proposals could make the system more sustainable by allowing employers to better manage their risks – in the same way that employers participating in single employer schemes can,” he added. “However, there is little question that in a non-associated multi-employer scheme a departing employer must cover its liabilities to the scheme. So we will need to look carefully at the details of the proposed changes to ensure that the right balance of member protection and employer flexibility is achieved. The strength of the ongoing relationship between employers and the scheme is essential to ensuring this.”
The relaxing of the rules comes as support has grown for greater consolidation of small pension schemes. One barrier to consolidation in the UK is the perceived regulatory difficulties of combining schemes, and how their liabilities would sit alongside each other.
The DWP’s consultation is open until 18 May and can be accessed here.
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