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The Employer Debt Regulations contain a list of schemes to which section 75 of the Pensions Act 1995 does not apply.
One of the exceptions is a scheme in respect of which a "relevant public authority" has given a guarantee (or made any other arrangements) for the purposes of securing that the assets of the scheme are sufficient to meet its liabilities.
A "relevant public authority" is defined as:
- a Minister of the Crown
- a government department (including any body or authority exercising statutory functions on behalf of the Crown); or
- the Scottish Ministers.
What will it mean?
- A scheme which has a guarantee from a "relevant public authority" will not be subject to the usual employer debt triggers (for further details see, Employer Debt: Basics).
- If the assets of the scheme are insufficient to meet its liabilties the "relevant public authority" giving the guarantee will assume responsibility for the shortfall in accordance with the terms of the guarantee (or other arrangements).
- Trustees may take the guarantee into account in future funding discussions.
- Schemes with a crown guarantee in place are not eligible for Pension Protection Fund (PPF) protection and are not liable to pay the PPF levy.
What form should a crown guarantee take?
There is no detail in legislation on how a crown guarantee (or other arrangements) should be worded.
From a trustee board's point of view, the main concerns with any guarantee (or other arrangements) are that they are:
- formally documented;
- unconditional; and
In our opinion, the PPF's standard form guarantee is a legitimate starting point when drafting a crown guarantee.
Partial crown guarantees
It is possible to put a crown guarantee in place for part of a scheme, any benefits payable under the scheme or any member of the scheme.
Where a pension scheme has a partial guarantee the element of the scheme not covered by the guarantee will remain eligible for PPF compensation (for further details see, Pension Protection Fund: Basics).
PPF entry and compensation
On 11 February 2009, the European Commission decided that the partial exemption of the BT Pension Scheme from payment of a levy to the PPF, arising from its Crown guarantee, constituted incompatible state aid (aid given through the non-payment of a levy could not be justified under EU rules because it relieved the company from charges that its competitors have to pay). The Government has therefore passed regulations to remove the partial exemption and enable schemes with a full Crown guarantee to become "eligible schemes" and pay the full pension protection levy, where retaining these provisions would give rise to incompatible state aid.
Author: Nigel Cayless