Know Your Statutory Employer

The Pensions Regulator (the "Regulator") has recently issued a statement to explain the importance of trustees of pension schemes identifying their scheme`s statutory employer(s). As an indication of the importance the Regulator places on this, from November 2011 it will require trustees to identify the scheme`s statutory employers in their on-line scheme returns.

The impetus for producing this statement is largely as a result of a recent decision by the Pension Protection Fund ("PPF") not to take over responsibility for the George & Harding Pension Scheme (the "Scheme") following the insolvency of the principal employer of that Scheme.

Zejwa Limited (the "Company") took over as principal employer in 2002 after the Scheme was closed in 1996, and had been making the contributions payable to the Scheme until it became insolvent in 2009. The trustees of the Scheme then applied for entry to the PPF.

The Pensions Act 2004 defines the statutory employer as "the employer of persons in the description of employment to which the scheme in question relates". The PPF decided that the Company did not meet the definition as it never employed active members of the Scheme, and therefore was not eligible for entry into the PPF - thus leaving members` benefits unprotected.

A recent case, Pilots National Pension Fund v Taylor (currently subject to appeal), also decided that a similar definition in the earlier Pensions Act 1995 means that an employer must employ or have employed active members or employees eligible to join the scheme at some point.

As a result of company restructurings and group reorganisations, there may be a number of schemes in similar circumstances where the current employer is not a statutory employer, and this could potentially disadvantage scheme members.

The DWP has indicated that it will propose legislation to protect schemes in such circumstances, if it decides that schemes are not appropriately protected. But for now, the position is as determined by the PPF and the Pilots case, hence the statement from the Regulator.

Under the definitions, there may be former employers that will be statutory employers; these may not have discharged their liability to the scheme, which could impact on their position in respect of the scheme.

The Regulator`s statement is aimed at trustees of schemes, but corporate clients should also take note, particularly if they are contemplating a group reorganisation where there is one or more defined benefit (ie final salary) scheme in operation, especially where the scheme or schemes are closed to new members and to future accrual.

It may be possible for a company to agree to take on responsibility for the scheme, even if it has not employed active members (ie by entering into a deed of substitution of principal employer) - however, the employer would not meet the statutory definition in such a case, and the Regulator would wish to review any documentation entered into to ensure that the employer did take on responsibility for the scheme.

The statement from the Regulator indicates that where the trustees determine that there is no statutory employer for the scheme, they must notify the Regulator so that the Regulator may help them to identify a statutory employer or help to deal with the situation where there is no such employer. Providing the Regulator with this information will also enable the Regulator to monitor the number of schemes in this position (presumably with an eye to aiding the DWP`s decision as to whether schemes are adequately protected under current legislation).

The statement suggests that in such cases the scheme may need to be opened temporarily to enable the employer to meet the definition of statutory employer, or the employer may need to employ perhaps a single active member so as to meet the definition.

This would appear to raise some significant questions in terms of potential amendments to scheme Rules that would be required, the increase in the administrative burden, and potential HR questions regarding employees, all for the sake of compliance with technical legislative definitions. It is to be hoped that the DWP will legislate to remove this disparity in the law, but until such time, companies and trustees of pension schemes should consider carefully the position.

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.