Search News and Articles
Section 75 - a word of warning
We are seeing more and more cases of problems for multi-employer schemes concerning the triggering of section 75 debts. One potential area of difficulty occurs where an employer ceases to have any active members. This may occur where the underlying business is sold or a restructuring takes place or may just be a result of the maturity of the business. If an employer ceases to have active members and that employer participates in a multi-employer defined benefit occupational pension scheme, it may well trigger a debt. That debt can include a share of orphan liabilities attributable to former participating employers. Therefore, don't fall into the trap of thinking that an employer with a few members necessarily means a small debt.
Another area to look out for is the position of former employers. Have they properly ceased to participate in the scheme or are they still technically participating? If a debt has been triggered but not collected, this is likely to cause problems for the scheme should it need to obtain the help of the Pension Protection Fund.
L and others v M Ltd
The Pension Protection Fund (PPF) entry rules provide that any compromise of a section 75 debt, unless it is an authorised arrangement, will make a scheme ineligible for PPF entry. This case concerns the application of PPF entry rules.
The trustees of the scheme concerned wanted to be sure that an agreement they were entering into would not render the scheme ineligible for entry to the PPF. The PPF itself had indicated that it had no problem with the agreement, but the trustees wanted to be sure.
The agreement
The sole employer of the scheme got into financial difficulties and PricewaterhouseCoopers recommended a plan to deal with this, including the release of the employer from its financial obligations to the scheme. The scheme had a funding shortfall of £9.5m on an FRS17 basis and £38m on a buyout basis.
It was proposed that the company's contingent liability to meet the £38m buyout deficit on a winding-up of the scheme be moved to a newly established company (Newco), which would then suffer a qualifying insolvency event. The scheme would then enter a PPF assessment period. This would enable the company to continue trading, and the PPF to take an equity stake in the business.
Newco would become a participating employer in the scheme, which would therefore be a multi-employer scheme. The scheme would then be amended to provide that on a winding-up of the scheme, the buyout deficit would be apportioned under s75 Pensions Act 1995 so that £1 was charged to the company, and the balance to Newco. On winding-up, Newco would not be able to pay the trustees, thereby triggering a PPF assessment period.
Court's decision
Warren J said that this resulted in a legally enforceable agreement which would alter the apportionment provisions which take place on the winding-up of the scheme. It was an agreement that would be made before any triggering event giving rise to a debt under s75 had occurred. At that time, there would be no debt due to the trustees.
The case centred on the interpretation of Regulation 2(2) of the PPF Entry Rules. Warren J felt that a debt had to be due already at the time of the agreement, and it was not enough that the agreement had the effect of reducing a debt that would, or even may, become due as a result of a triggering event in the future.
L and others v M Ltd [2006] EWHC 3395 (Ch)
Mark Catchpole, Head of pensions, Stephenson Harwood.
E-mail: mark.catchpole@shlegal.com.