Flexible Apportionment Arrangement

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Section 75 Employer Debt
Flexible Apportionment Arrangement

Introduction

When an employer in the Scheme has a cessation event, that employer has a statutory obligation to pay a section 75 employer debt charge to the Scheme. It may be possible in certain circumstances to reassign an employer’s liability to pay a section 75 employer debt charge to another participating employer in the Scheme using a Flexible Apportionment Arrangement.

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What is an FAA?

Put simply, a Flexible Apportionment Arrangement (“FAA”) is a legal agreement which transfers pensions liabilities in the Scheme from one employer to another.

A valid FAA will mean the previous employer (“employer A”) does not have to pay a Section 75 employer debt as the liability is passed to a different employer (“employer B”). Employer B has to both agree to and have the ability to take on employer A’s liabilities.

For further information about FAAs, the Pensions Regulator’s website has a section dedicated to multi-employer schemes.

What is the criteria for an FAA?

Certain conditions must be met for a legally binding FAA to be set up. These are as follows:

The employer (Employer B) agreeing to takeover responsibility for the departing employer’s (Employer A) pension liability must already be participating in the Scheme, or will participate following the FAA. Both employers must consent in writing to the FAA.
A cessation event has, or is about to occur. This may be a change in legal entity or ceasing to have any active members.
The ‘Funding Test’ must be met, to ensure Employer B is financially able to take on Employer A’s pension liability and the Scheme is no worse off from a funding perspective.
The employers requesting an FAA must pay the Trustee’s costs associated with the FAA.
The Trustee must consent to the FAA.

What is the process to set up an FAA?

The FAA process varies depending on the size and circumstances of an employer. A streamlined FAA process exists for small employers wishing to incorporate. An FAA may be appropriate for companies wishing to restructure e.g. a parent company wants to merge some of its subsidiaries.

Please get in touch to discuss your situation and whether an FAA can help.

What does it cost?

The cost of an FAA will depend on the size, materiality and complexity of the case.