DDAs: a new medium of deferral for Section 75 Debts
From 6 April 2018 a new way of dealing with Section 75 Debts has been introduced for all multi-employer defined benefit schemes – the Deferred Debt Arrangement (DDA).
The purpose of a DDA is to introduce an option to allow the trustees and the departing employer to agree to defer the departing employer’s requirement to pay the often substantial Section 75 debts, which could be triggered when they no longer employ active members of a Scheme. The threat of a Section 75 debt has kept many employers and their employees within Schemes with increasing and unaffordable costs of accrual for some time. The DDA may be an effective way to deal with these situations.
A DDA allows a departing employer, with the consent of the Trustees, to postpone a debt whilst remaining liable for all other obligations under the Scheme. Before granting their consent, Trustees must be satisfied that the departing employer will be able to continue to meet its remaining obligations. Therefore, Trustee consent will not be granted where the Scheme is under PPF assessment or in the process of being wound up.
Furthermore, the Trustees must ensure that a PPF assessment is unlikely to begin within the next 12 months, or that the departing employer’s covenant with Scheme is not likely to materially weaken in the next 12 months before allowing a DDA to take effect. There must also be other participating employers within the Scheme, sponsoring active members.
In theory, the Section 75 debt could be deferred indefinitely. However, it is likely that the Trustees will have a deferred payment arrangement in place to allow the deferred employer to pay their debt to the Scheme over time.
Ultimately, the power – and the responsibility – lies with the Trustees. They hold a unilateral power to end the DDA and trigger an exit debt if they believe the deferred employer’s covenant has materially weakened.
This, however, will require continuous scrutiny of the employer’s financial situation and regular advice from advisers. Trustees must also consider the fact that a departing employer entered into a DDA to avoid a substantial exit debt and therefore, triggering this debt later may force the employer into insolvency.
The DDA will also be brought to an end if the deferred employer subsequently employs an active member of the scheme or if all employers of the scheme cease to employ active members.
While an early flurry of employers consider the benefits of a DDA, Trustees (and their advisers) must ensure a DDA is the best course of action for the Scheme, the departing and continuing employers and, most importantly, the members.