• Employer Debt Regulations May Rule Out Withdrawal Arrangements
  • September 29, 2005
  • Law Firm: Mayer, Brown, Rowe & Maw LLP - Chicago Office
  • The small print of the latest Regulations as to "employer debts" may deprive employers of a lifeline which they were hoping for.

    The Regulations specify the debt which becomes due from an employer under section 75 of the Pensions Act 1995 if the employer withdraws from a multi-employer defined benefit scheme.

    The Regulations say that the employer debt is calculated on the (very demanding) buy-out basis, unless a "withdrawal arrangement" is put in place and approved by the Regulator. A withdrawal arrangement is an agreement with the scheme's trustees under which:

    • the employer is liable for a debt calculated on the (much less demanding) MFR basis, and
    • a named guarantor undertakes to pay an amount calculated on the buy-out basis in specified circumstances (e.g. winding-up of the scheme).

    But there is a catch. A provision in a Schedule to the Regulations says that the Regulator can approve a withdrawal arrangement only if the guarantor has or will have such resources that the employer debt is "more likely to be met" if the arrangement is approved.

    On the face of it, this seems to mean that the Regulator cannot approve a withdrawal arrangement in any case where the employer could in fact meet the full buy-out debt - even though meeting the debt might have a disastrous effect on the employer's business and its employees.

    We imagine that the provision in the Schedule is a drafting error. It gives rise to strange results and is difficult to square with what the Government had said previously - not least in its notes to the enabling legislation (the Pensions Act 2004). The notes suggested that, before approving a withdrawal arrangement, the Regulator would need to be satisfied as to the financial strength of the guarantor. But there was no indication that the Regulator would be prevented from approving a withdrawal arrangement wherever the employer was able, if forced, to pay the buy-out amount.

    We hope that the Government will move swiftly to amend the provision in the Schedule. If not, the provision will cause difficulties for employers with defined benefit schemes, and may ultimately be contrary to the interests of scheme members.

    Regulations referred to: the Occupational Pension Schemes (Employer Debt etc.) (Amendment) Regulations 2005 (SI 2005/2224)