From November 2011, trustees have had to list their pension scheme's statutory employers on their scheme returns. There are different definitions of employer under legislation dealing with scheme funding, section 75 debts and eligibility for the PPF. Initially, it seemed that trustees would have to identify employers that met any of these definitions. However, the Pension Regulator's latest guidance is that only employers which satisfy all three definitions should be listed on the scheme return.
This certainly makes it easier for trustees in schemes with active members to be confident they are complying with the Regulator's requirements. The Regulator's main concern seems to be with schemes closed to all benefit accrual where it may not be as clear which companies meet the definition of employer for ongoing funding purposes.
Trustees should nevertheless ensure that their records are sufficient to identify the employer for either funding, section 75 or PPF purposes as this is critical to their understanding of the entities with a legal obligation to support their scheme and to PPF eligibility.
In more detail
The Regulator announced last year that scheme returns from November 2011 would have to identify the scheme's statutory employers. The Regulator stressed the value of this in ensuring trustees understand which entities are legally obliged to support their scheme when reviewing employer covenants in the valuation process. Particular concerns have arisen in schemes closed to all accrual where, perhaps following company reorganisations or takeovers, the principal employer has never been an employer of active members and has no statutory liability to the scheme, even though it may be making deficit reduction contributions.
The Regulator's focus is therefore on the employer for scheme funding purposes. But he also recognised the importance of identifying which entities are potentially liable for a share of the underfunding on ceasing to participate or on scheme wind up (the section 75 debt); and which may trigger, on their insolvency, an assessment period, the initial step in the process potentially leading to PPF entry for the scheme.
Who is the employer under pensions legislation?
The test is subtly different according to whether trustees are testing for the employer for scheme funding or section 75 or PPF purposes. Ideally it would be the same for all 3 tests but pensions law is rarely ideal.
It should be an easy matter to identify current employers of active members, who will be statutory employers for all purposes. Occasionally problems can occur if, say, there have been TUPE transfers within the employer corporate group or if contracts of employment have not been updated after past re-structures.
The status of former employers will often be more difficult to establish. The critical information the trustees will need as a starting point is the date when an employer ceased to employ active members and, if later, the date it ceased to employ anyone who was entitled to join the scheme (whether or not this required the employer's or the trustees' consent). The funding position of the scheme at the relevant time and whether the former employer paid its share of any underfunding will also be relevant in establishing whether the former employer remains an employer for section 75 and PPF purposes.
This is a complex area which has been affected by a recent decision of the High Court (the Pilots case). The law has changed over time and is not clear in certain areas. In many cases, trustees will need professional help to establish the position, a point recognised by the Regulator in his guidance, particularly for schemes closed to future accrual.
Who is the statutory employer?
Initially, it seemed that the Regulator intended trustees to include in the scheme return those entities that were employers under any of the legal tests. However, he has provided further guidance for trustees/administrators which is accessible on Exchange when completing the return. This makes clear that an entity must satisfy ALL the legal definitions in order to be included as a statutory employer in the scheme return. So an employer must be an employer for ongoing funding, statutory debt AND PPF purposes.
This simplifies the process, particularly for defined benefit schemes which remain open to benefit accrual.
Trustees should still try to identify the scheme employers under each of the legal definitions to ensure they know when employers have left the scheme and ceased to be liable for ongoing funding and to ensure that any obligation to pay a section 75 debt has been identified.
They need to ensure that the information supplied by the employers identifies who employs each member and that any changes in employer are also recorded. This information can be confused where there is centralised payroll and employments switch between employers with the minimum of formality. The Regulator expects trustees to be robust in checking the employment information they are supplied with.
This will not just help to identify the statutory employers but will also assist in the calculation of any section 75 debt that arises, where pensionable service has to be allocated to the employer at the time of the service, not the last employer.
Once the statutory employers have been identified, the Regulator urges trustees to be vigilant for any change, and particularly any reorganisation, that could separate the scheme from its statutory employers, potentially leaving it with no entity that is legally obliged to support it and ineligible for PPF entry.
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