8 March 2018

A new way to deal with the statutory debt of an exiting employer

A statutory employer debt is broadly the amount an employer must pay into a defined benefit scheme if, when it ceases to participate, there is a shortfall between the scheme’s assets and liabilities. The debt is calculated on a buy-out basis and so can be very expensive for the departing employer. There are currently several options for dealing with the debt in a different way – for example, so that the employer's scheme liabilities are assumed by another employer participating in the scheme. However, this is subject to certain prescribed conditions being satisfied, so such an option is not always available in practice.

Following a 2015 call for evidence, the Government has now confirmed changes to the regime for multi employer schemes generally, due to take effect from 6 April 2018, to permit an exiting employer to enter into a 'deferred debt arrangement'. This would be subject to the employer in question retaining all of its previous 'employer' responsibilities to the scheme and to a number of conditions being satisfied – for example, that the trustees are satisfied that the scheme is 'unlikely' to enter a PPF assessment period and that the deferred employer's covenant to the scheme will not 'weaken materially', both within the 12 months from the effective date of the deferred debt arrangement. The trustees also have to provide their written consent.

These changes will provide welcome additional flexibility, particularly for smaller employers where the immediate liability to pay a statutory debt can be crippling for the business. However, much will depend on how trustees assess the various conditions to be satisfied and so whether or not this mechanism can be used. We have extensive experience of advising in relation to the treatment of employer debts, so if you would like more detail on this, please do let us know.

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