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Employer Debt: Trustee-sanctioned withdrawal arrangements (TWAs)

Under section 75 and section 75A of the Pensions Act 1995, where the value at the trigger time of a defined benefit (DB) scheme's assets are less than a scheme's liabilities (both calculated on a prescribed basis), the amount equal to the difference is treated as a debt due from the employer to the scheme trustees (the employer debt).

Instead of paying the full debt immediately one of the options for managing the debt the employer exiting the pension scheme can enter into a withdrawal arrangement.

A withdrawal arrangement must (amongst other things) comply with the following requirements:

• the trustees, cessation employer and guarantor(s) must be parties;
• it must provide for the date on which it is to come into force; 
• the agreement must provide for the cessation employer to pay an amount equal to or greater than “Amount A” (broadly the debt calculated on a scheme funding basis) at a specified time; 
• the agreement must also provide for the guarantor to pay Amount B if certain events happen (see below) and also specifies how Amount B is to be calculated.
  

The following requirements apply to TWAs:

• the first limb of the funding test must be met (see below);
• the trustees must be satisfied that at the date of the agreement the guarantors have sufficient financial resources to be “likely to be able to pay Amount B”.
  

Funding Test

The funding test will be met if the trustees are reasonably satisfied that, when the arrangement takes effect, the remaining employers will be reasonably likely to be able to fund the scheme so that it will have sufficient and appropriate assets to cover its technical provisions (taking into account any changes to the technical provisions that may need to be made as a result of the withdrawal arrangement, for example, because of a consequential reduction in the employer covenant).

Author:        Zoe Lynch
Updated:    May 2013