Section 75 debts: DWP consults on yet another possible relaxation
Help is at hand for employers which accidentally cease to have active members, or is it?
One can liken section 75 for employers in DB multi-employer schemes to a prison. Over the years, various escape tunnels have been constructed with varying degrees of success and now another way out has been proposed.
Rather than an exiting employer paying its section 75 debt, existing alternatives consist of various types of apportionment arrangements, including most recently flexible apportionment arrangements and also regulated apportionment arrangements which can sometimes apply in "distress" situations; further (but little used) exemptions relate to business restructurings.
For charity employers participating in a scheme for non-associated employers – where it may be impossible to shift scheme liabilities to the shoulders of another scheme employer – apportionment is usually unavailable.
The problem is increased where employers 'accidentally' cease to have any active members (at a time when one or more other employers continue to have active members). This triggers a section 75 debt and the 'period of grace' provisions (whereby the debt trigger can be avoided if a new active member is admitted) help only if operated within tight timescales.
In its April 2017 consultation (the Consultation), DWP propose an alternative – permitting the exiting employer to defer its section 75 debt (a deferred debt arrangement or DDA for short).
Under a DDA the Consultation envisages the exiting employer can, subject to the scheme trustees' consent, defer its section 75 debt but it must continue in the scheme and retain its scheme responsibilities. The DDA proposal applies both to schemes for non-associated employers and for schemes with associated employers.
Conditions for DDA
The scheme trustees cannot consent to a DDA unless various conditions are met including that they are reasonably satisfied that the "funding test" is passed. This is the same "funding test" as for flexible apportionment arrangements. The test has both funding and covenant elements and can be difficult to apply albeit the problems can usually be overcome.
Terminating the DDA
Unfortunately the draft Regulations contain so many conditions about the DDA prematurely terminating that the DDA concept is almost dead in the water before it starts. The terminating conditions include where the trustees are reasonably satisfied that the employer's covenant is likely to weaken in the next 12 months. Nor does the employer have a free hand, even if it wants to pay its section 75 debt during the deferred period. In this case it has to agree the due date for calculation purposes with the trustees before it can trigger its debt.
The DWP Consultation closed on 18 May 2017. DWP intend to consider responses and reply by mid-Summer. In our view the DDA is a useful concept but the proposed DDA regime needs to be considerably relaxed if the DDA is to be of any practical use.
The earliest the new DDA proposals can have effect is October 2017. Whether this is feasible post the General Election remains to be seen. By the Autumn we may have had another General Election!
Although the DDA concept may not see the light of day, two other changes proposed in the Consultation are more likely to be implemented, namely:
- extending the time for giving a 'period of grace notice' from 2 months under the existing legislation, to 3 months; and
- ensuring that an employer merely changing its legal status (e.g. an incorporated charity becoming a company) does not itself trigger a section 75 debt.
Employers participating in multi-employer schemes should ensure they obtain legal advice on section 75 matters. Identifying tunnels out of the section 75 prison and how to use them is important and, should DDA arrangements be enacted, will become more complicated.