Deferred Debt Arrangements

From 6 April 2018, employers who are members of multi-employer defined benefit schemes will have the option of entering into a Deferred Debt Agreement (“DDA”) in order to avoid crystallisation of their employer debt when an employee cessation event occurs.

Employer Debt

Employer or “Section 75” debt is triggered when an employment cessation event occurs, i.e an employer in a multi-employer defined benefit scheme ceases to employ any active members in the scheme and another employer still has active members in the same scheme.

The value of the employer debt is the difference between the employer’s liabilities under the scheme and the scheme’s relevant assets in relation to those liabilities, an amount that can often be substantial.

Many employers have raised concerns that the requirements relating to these debts are overly onerous, particularly for smaller employers where the employer debt can simply be unaffordable. DDAs are therefore intended to address these difficulties by providing an ability to defer the payment of the employer debt until a later date.

Deferred Debt Arrangements

A DDA is entered into between the multi-employer scheme and the employer wishing to become a ‘deferred employer’.

Under a DDA, the deferred employer maintains an on-going commitment to the pension scheme and is treated as if they are still employing one person who is an active member of the scheme, although in reality they have no active members.

Trustee consent is required in order for a DDA to proceed. The Trustees are able to consent if:

  • an employment cessation event has occurred;
  • the scheme is not in a Pension Fund Protection assessment period or being wound up;
  • the trustees are satisfied the scheme is unlikely to go into a Pension Fund Protection assessment in the next 12 months; and,
  • the trustees are satisfied that the employer’s covenant is unlikely to weaken materially in the next 12 months.

Once the DDA has come into effect, the employer will have no liability to pay the employer debt until circumstances arise which terminate the DDA.

Termination of a DDA

A DDA will terminate in a number of circumstances such as where the trustees consent, where the scheme is wound up, where the employer engages in certain types of restructuring or where all employers in the scheme are insolvent or in DDAs.

Depending on the reason why termination of the DDA is triggered, an employment cessation event may occur and employer debt will become payable at this point.

When might a DDA be useful?

DDAs are in many ways similar to the funding arrangements that some employers are able to enter into with LGPS schemes so introduce a welcome new degree of flexibility for employers in defined benefit schemes such as SHPS. Entering into a DDA can also buy the employer time in which to make deficit contribution payments and so reduce the employer liability that will ultimately be due.

However, DDAs are unlikely to be as attractive in corporate transactions where an employer wishes to be free of its DB liabilities, as an under a DDA an employer retains their liabilities and responsibilities in relation to the scheme. In these situations, employers are likely to consider apportionment or withdrawal arrangements to be more appropriate.

If you have any queries, please contact your usual contact in the employment and pension’s team.

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