The National Association of Pension Funds believes there is a strong case for the re-examination of employer debt regulations.

The NAPF issued a response to the Department for Work and Pensions’ call for evidence on employer debt, under Section 75 Pensions Act 1995 in non-associated multi-employer defined benefit pension schemes.

In its response the NAPF agrees the current situation, in which the loss of an employer’s last active member triggers a buyout debt on the employer under section 75 Pensions Act 1995, is causing problems for employers who participate in non-associated multi-employer schemes, and for some schemes as well.

The NAPF submitted a detailed response that analysed possible easements and suggested that the loss of the last active member should trigger a debt on the technical provisions of the scheme, but not a full buyout debt that is based on the cost of purchasing annuities.

Under the employer debt regulations, a debt based on the cost of buying annuities for employees of the employer is triggered not only when the scheme of an employer’s business is being wound up, but also when an employer that remains in business no longer employs an active member in the scheme that is open to accrual. In this last circumstance, the buyout debt is artificial.

The trustees will not usually be contemplating purchasing annuities with the funds obtained, but will continue to pay benefits out of the scheme at a lower projected cost. This can lead to distorted behaviour. An employer may artificially retain a single active member in the scheme to avoid triggering the debt, the NAPF explained.

In addition, the association said it also encourages a game of “chicken” among employers in which each employer must weigh whether it is more advantageous to remain active in the scheme while other employers pay buyout debts or to trigger the debt in order to avoid shouldering liabilities of other employers in the future.

The NAPF found that while the current regulations work well for some schemes, for others that have the most need for innovative approaches to funding are constrained by them. It stated employers are not being unreasonable when they complain that the current regime sometimes creates an artificial debt at an artificial moment in time.

It added that the departure of an employer’s last active member is the most problematic of the cessation events. The association said it would be useful to employers and even to many schemes, especially where the employers are not associated, if this cessation event could be treated differently from the others.

After carefully evaluating the debate, the NAPF said the approach whereby an employer, upon losing its last active member, becomes immediately liable for its debt calculated on a technical provisions basis rather than on a buyout basis appears to best satisfy its criteria for a reasonable accommodation of reasonable employer complaints.

If an employer wishes to obtain a full statutory discharge, it can pay the debt on a buyout basis. Otherwise, it will pay its debt on the technical provisions immediately but remain undischarged and liable for the remaining debt should the scheme’s funding position deteriorate or another cessation event arise, stated the NAPF.

The consultation opened in March and closed on the 22 May.

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