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Section 75 debt

A

AR123

Member
Hi, i'm getting a bit confused as to when a section 75 debt/debt on the employer is triggered and what actually happens in practice.

Firstly i'm assuming "Debt on the employer" referred to in chaper 14 on Discontinuance is the same as section 75 debt referred to in chapter 18 on M&A? Is this correct?

My understanding is that if an employer chooses to stop supporting a pension scheme (either due to its insolvency or otherwise) then they will be required to immediately pay a lump sum into the pension scheme to cover any shortfall against liabilities calculated on a buy out basis. However, what constitutes "to stop supporting the scheme" and subsequent triggering of the debt? Is the debt only triggered when the scheme is actually wound up and the liabilities are transferred to an insurance company?

Under "Discontinuance" it seems sensible that the debt would be triggered if the employer was intending to buy out all the liabilities with an insurance company but not necessarily for the other methods of discontinuance e.g. transfer of liabs to another pension scheme with the same sponsor, transfer to a personal pension (unless this is compulsory) and running the scheme as a closed scheme. Is it triggered in these cases or just when the employer is actually winding up the scheme and buying deferred and immediate annuities from an insurance company?

Under the M&A chapter it suggests that a section 75 debt is not necessarily triggered when the employer stops supporting the scheme due to a merger or acquisition. For example page 8 suggests that it would only be triggered if there was no other employer to take on the liabilities. This again would seem sensible as if the liabilities were just being transferred to the new employer then there is no need to necessarily transfer assets equal to the buy out cost of liabilities. And in reality this is not the case as the bulk transfer is usually calculated on a realistic basis. I assume the argument is similar in the discontinuance case where the liabilities are simply transferred to another scheme under the same employer and therefore as there is another sponsor to take on the liabilities a debt on the employer is not triggered. Is section 75 debt in this case only triggered if the trustee decides to wind up the scheme (if it is allowed to under the trust deed and rules) rather than transfer the liabilities to the new sponsor? I'm guessing it may choose to do this if it believes this is best for the members rather than transferring the liabilities to the new fund??

Please can you help clarify.
Many thanks
 
Thanks for your queries, my replies are in bold below

Hi, i'm getting a bit confused as to when a section 75 debt/debt on the employer is triggered and what actually happens in practice.

Firstly i'm assuming "Debt on the employer" referred to in chaper 14 on Discontinuance is the same as section 75 debt referred to in chapter 18 on M&A? Is this correct?

Yes

My understanding is that if an employer chooses to stop supporting a pension scheme (either due to its insolvency or otherwise) then they will be required to immediately pay a lump sum into the pension scheme to cover any shortfall against liabilities calculated on a buy out basis. However, what constitutes "to stop supporting the scheme" and subsequent triggering of the debt? Is the debt only triggered when the scheme is actually wound up and the liabilities are transferred to an insurance company?

The debt is invoked in one of three circumstances:

1. Insolvency of the employer

2. Wind up of the pension scheme

3. When a participating employer ceases to participate in a multi-employer scheme, though there may be some ways around this issue. In practice this can be complex, and the details are outside the scope of the SA4 syllabus.

Under "Discontinuance" it seems sensible that the debt would be triggered if the employer was intending to buy out all the liabilities with an insurance company but not necessarily for the other methods of discontinuance e.g. transfer of liabs to another pension scheme with the same sponsor, transfer to a personal pension (unless this is compulsory) and running the scheme as a closed scheme.

Is it triggered in these cases or just when the employer is actually winding up the scheme and buying deferred and immediate annuities from an insurance company?

The debt is invoked in one of the three circumstances above.

Under the M&A chapter it suggests that a section 75 debt is not necessarily triggered when the employer stops supporting the scheme due to a merger or acquisition.

For example page 8 suggests that it would only be triggered if there was no other employer to take on the liabilities.

See case 3. above. We can't see on the reference to this on page 8 of Chapter 18.

This again would seem sensible as if the liabilities were just being transferred to the new employer then there is no need to necessarily transfer assets equal to the buy out cost of liabilities. And in reality this is not the case as the bulk transfer is usually calculated on a realistic basis.

The assumptions used to calculate the bulk transfer value will be a matter for negotiation. Usually you would expect the bulk transfer amount to be fairly realistic, and to be lower than the cost of buying out benefits with an insurance company.

I assume the argument is similar in the discontinuance case where the liabilities are simply transferred to another scheme under the same employer and therefore as there is another sponsor to take on the liabilities a debt on the employer is not triggered

Yes - although if for example a sponsor transfers all the assets and liabilities from one scheme to another, then the scheme would be likely to be wound up, and a debt would be triggered.

Is section 75 debt in this case only triggered if the trustee decides to wind up the scheme (if it is allowed to under the trust deed and rules) rather than transfer the liabilities to the new sponsor? I'm guessing it may choose to do this if it believes this is best for the members rather than transferring the liabilities to the new fund??

If we are transferring liabilities between schemes of the same solvent single employer, then yes the debt would only be triggered if there was a decision to wind-up the scheme (it could also be the employer who makes that decision, depending on the powers in the rules). Or if one of the other three conditions above occurs.

Please can you help clarify.
Many thanks

Hope this helps!
 
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