Changes To UK Pensions Section 75 Debt Regime

Author:Ms Catherine Drinnan
Profession:Latham & Watkins
 
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In a UK multi-employer pension plan, when a participating employer ceases to participate in the plan at a time when one or more of the other employers continue to participate (which in this context means continuing to employ active members who are accruing benefits under the plan), it triggers the departing employer's Section 75 Debt. This commonly occurs when an employer is sold but the pension plan and the other plan employers remain behind with the seller. The Section 75 Debt, referring to Section 75 of the Pensions Act 1995, will, unless alternative arrangements are put in place, be the departing employer's share of the plan's deficit, calculated on the full buy-out/insolvency basis. The buy-out deficit is calculated by determining the level of funding required for all the plan benefits to be bought out immediately with an insurance company. As this allows no opportunity for future contributions from the employer or investment return, the buy-out deficit is often significantly higher than the ongoing or accounting deficit of the plan. This can be a significant issue in corporate restructurings or disposals.

There were originally four permitted alternative arrangements (a scheme apportionment arrangement (SAA), a regulated apportionment arrangement, a withdrawal arrangement and an approved withdrawal arrangement), which allow the trustees and the employers to agree that the departing employer's Section 75 Debt will be less than its share of the buy-out deficit. New Regulations, which came into force on January 27, 2012, introduced another alternative, the flexible apportionment arrangement (FAA). The FAA, based on the existing SAA, permits the apportionment of all the liabilities (actual and contingent) of the departing employer to another employer or employers that remain in the plan. Unlike under an SAA, no Section 75 Debt will technically be triggered, but the departing employer...

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