08 April 2013 - Post by:Emma Bichard
Nowadays, pension scheme trustees have to declare the identities of a scheme’s statutory employers every year on the scheme return. There’s a reason for this: trustees have to be vigilant to the risk of being left without a statutory employer and therefore losing members the protection of the Pension Protection Fund. It isn’t always obvious it’s happening. Bulk transfers and employer substitutions can cause problems if you don’t plan ahead, and it is a risk which is ever increasing as more and more schemes are closed to future accrual.
If either of these changes are currently in the pipeline for your scheme, take a look at what you can do to ensure that your scheme retains a statutory employer.
A statutory employer is not the same thing as having a company sponsoring the pension scheme. You may remember that Däna Burstow looked at identifying your scheme’s statutory employers before (Do you know who your statutory employers are?). A scheme’s statutory employer is important for a number of reasons. A key one is that only the insolvency of a statutory employer will trigger admission to the PPF. If a scheme does not have a statutory employer at the time it loses employer support, members won’t qualify for PPF compensation. The scheme will be left with nothing more than a refund of scheme levies…as the PPF would say, rules are rules.
Over time employers may change and the businesses sponsoring the scheme will not necessarily satisfy the statutory definition. This is because a statutory employer is someone who has either employed active members of the scheme or people who were eligible to become active members. In certain situations this can cause problems because employers taking over responsibility for a scheme, for example, a scheme closed to future accrual, will not have employed any active members of the scheme and so are unlikely to meet the statutory definition. Trustees should therefore monitor any proposed changes to the scheme’s employers closely, particularly if one of the following changes is being considered:
– an employer substitution in a single employer scheme which is closed to future accrual. The G&H scheme is a stark reminder of this risk (Independent report 27 January 2011); and
– a bulk transfer of defined benefit liabilities to a group scheme in which no DB liabilities have accrued. This is because employers who have only ever employed scheme members earning defined contribution pots do not count as statutory employers.
If such an event is planned, the risk of being left without a statutory employer can be avoided, provided you take action before the change is made. One route is to arrange for the new employer to employ an active DB member of the scheme. You may need to amend the scheme rules to re-open the scheme temporarily to accrual. Accrual doesn’t need to continue for long, the fact it has happened is enough to give the scheme a new statutory employer and continued protection from the PPF.
For more information on identifying your statutory employers, please see the Pension Regulator’s statement of July 2011.
Emma Bichard is an associate at Allen & Overy LLP.