Regulator warns against ‘double-counting’ in DB schemes

The Pensions Regulator has reminded trustees and employers of multi-employer defined benefit schemes that payments under a schedule of contributions cannot also be considered payments towards ‘section 75’ debts, or vice versa.

In most cases, an employer leaving a scheme results in a change to the employer covenant. To avoid double counting, trustees should assess the impact of an employer departure and deal with the section 75 debt and ongoing funding issues separately.

When an employer has departed, trustees will need to consider whether the investment strategy and funding plans are still appropriate, considering both any increase in the scheme’s assets and any deterioration of employer covenant.

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Legislation requires the section 75 debt that is triggered when an employer departs from a multi-employer scheme to be treated as a separate payment from ongoing contributions to repair the pension scheme’s deficit under a recovery plan, the Pensions Regulator said.

In a previous statement, the regulator said: “The section 75 debt of an employer is a discontinuance debt and is distinct from ongoing funding obligations. Care should be taken not to double count deficit payments paid as part of a recovery plan as payments towards section 75 debts, or vice versa.

“A recovery plan should reflect the assessed covenant of the employer whereas a section 75 debt is often a result of an event that changes the covenant.”

It is currently dealing with a number of cases where section 75 debt repayments and ongoing recovery plan payments have been ‘double counted’, contrary to legislation.

The legislative framework creates two distinct obligations for employers:

• Section 75 debts are payable by departing employers (including on employer cessation, insolvency, or scheme wind up); and

• Scheme funding applies to remaining employers who have continuing obligations to fund an ongoing scheme.

Some of the risks of double-counting include leaving a debt owed to the scheme unpaid, which will have a “detrimental impact to scheme assets and member security”.

Other risks include potential ineligibility of the scheme for Pension Protection Fund entry and failing to properly consider the impacts on the ‘employer covenant’ following an employer departure, the regulator said.

Geoff Cruickshank, the regulator’s interim executive director for DB regulation, said: “Double counting carries significant risks for schemes and members and it is important that trustees understand these risks and how to avoid them. Where we become aware that double counting has occurred we will raise this with the trustees and expect it to be addressed.”