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Employer Debt: Calculating debt on an Employment Cessation Event

Companies routinely cease to participate in pension schemes following transactions or group re-organisations. The sponsoring employer and the Trustee must consider carefully how such an exit or employment cessation event ("ECE") will impact on the Scheme.

When can a debt arise?

• When an employer ceases to participate in the Scheme (the cessation employer), its share of the scheme's deficit becomes a debt due to the trustees (the employer debt).
• The debt is assessed on a buy-out basis.
• For further details see, Employer Debt: Triggering a calculation - Employment Cessation Event.

How is the employer debt calculated?

Unless the scheme rules specify otherwise, the proportion of debt owed by the cessation employer will be "the amount calculated as at the applicable time as the employer's share of the total difference between the value of the assets and the amount of the liabilities of a scheme", plus cessation expenses (see below). For example:

• scheme liabilities are £1bn
• company A leaves and has £200m liabilities
• companies B and C remain with £200m liabilities each
• total scheme buy-out deficit is £300m

A's share of the buy-out debt is 300 x 200 ÷ 600 = £100m which covers:

• its own active, pensioner and deferred members; and
• a proportion of the buy-out debt attributable to £400m of scheme liabilities relating to employers which are no longer active participants.

Instead of paying its full debt (£100m in the above example) immediately, the cessation employer can enter into a withdrawal arrangement (for further details see, Employer Debt: Multi-employer schemes - withdrawal arrangements (basics)).

Cessation Expenses

Cessation expenses attributable to a cessation employer are ”all expenses which, in the opinion of the trustees or managers of the scheme, are likely to be incurred by the scheme in connection with the ECE occurring to an employer in relation to the scheme ”.

In practice, this means a considerable additional cost can be charged by the trustees to the cessation employer. For example, an actuarial valuation is likely to be required in order to calculate the assets and liabilities, plus professional fees for advice on the matter.