If you stop using CWPF as your pension scheme, you might need to pay a final exit debt, commonly called a Section 75 debt.
Avoiding a Section 75 debt is a criminal offence.
Section 75 debts
Section 75 law is complex. This page explains how it works in broad terms, based on current law. Whether you have triggered Section 75, or you might do in the future, you should take your own legal advice.
You can find guidance from the Pensions Regulator on Section 75 debts here.
CWPF is used by a wide range of Church of England organisations which are not connected to each other. Each organisation picks which CWPF section it uses and what benefits it provides. Some organisations might use more than one section. This makes CWPF a ‘non-associated, multi-employer’ pension scheme.
CWPF includes:
- Defined Benefit Scheme (DBS)
- Pension Builder Classic (PB Classic)
- Pension Builder 2014 (PB 2014)
We notionally separate the assets for each section and then notionally separate the assets for each DBS employer.
If you trigger a ‘cessation event’, you are responsible for the liabilities your members have built up, plus a share of any ‘orphan’ liabilities. If you use more than one section, we assess your liabilities for each section separately.
Cessation events
You will trigger a ‘cessation event’ if you:
- no longer employ someone who is accruing benefits in CWPF and you do not intend to enrol anyone else,
- become insolvent or you begin to wind up, or,
- stop using CWPF to provide pensions for your employees.
If you trigger a cessation event, Section 75 of the Pensions Act 1995 requires you to pay a share of the ‘buy-out’ deficit. This is the amount an insurance company would charge to pay members’ benefits.
We measure each section separately, so the buy-out deficit might be different for each section.
Your share of the deficit will reflect your liabilities (your current and former employees) against all other employers who use that section, plus a share of orphan liabilities and cessation costs.
In practice this means larger employers pay a greater share of the deficit.
What happens if we stop using one section but still use another. Does this trigger a Section 75 debt?
Section 75 only applies when you no longer have any members accruing benefits in CWPF. As DBS, PB Classic and PB 2014 are all part of CWPF, you can move between sections without triggering a Section 75 debt.
Any Section 75 debt is deferred until you stop using CWPF altogether. At this point the debt is triggered and calculated for all the sections you have used.
What about employer changes and reorganisations?
If you change your organisational structure, you might trigger a cessation event and a Section 75 debt.
This might happen if you incorporate with limited liability or merge with another organisation. If this happens you may be able to agree an “apportionment arrangement” which assigns your liabilities to the new employer or the organisation you are merging with.
We need to be sure the new organisation taking over your liabilities has a covenant (financial strength) strong enough to support all the promised benefits before we agree this.
What if our last member left suddenly and we didn’t intend to trigger Section 75?
The most common way of triggering a cessation event is when your last active member leaves, retires or die. There are actions you can take to avoid triggering an immediate debt:
Period of grace
You can tell us you would like a “period of grace”. If you tell us within 3 months of your last member leaving, you have 12 months (possibly up to 3 years with our agreement) to employ someone new and enrol them into CWPF.
This gives you time to put someone new into CWPF. However, plans can change. If you do not employ someone new or you decide to use a different pension scheme, the cessation event is backdated, and any Section 75 debt becomes due. This also applies if you become insolvent during the period of grace.
Deferred debt arrangement
Instead of paying the Section 75 debt, we may agree a ‘deferred debt arrangement’.
You would need to meet specific conditions which we would explain at the time. If we agree, we will review the funding level of the sections you have used from time to time. If they reach 100% or more on a ‘buy-out basis’, you can ask us to cancel the arrangement. You can then leave without paying a Section 75 debt.
While your debt is deferred, we may require you to make additional payments. We will definitely require this if you have members with benefits in the Defined Benefit Scheme section. These could include:
- deficit recovery payments,
- administration costs,
- advisor costs we incur to run the deferred debt arrangement.
How do I know which is the best option?
If you trigger a cessation event, we will explain your options, but we cannot advise you which option is best. Please talk to us as soon as you can if you think you may trigger a debt. You may also want to seek independent advice.
How is a Section 75 debt calculated?
CWPF is different to typical pension schemes - there are many unconnected employers that use different CWPF sections, with each section providing different types of benefits.
CWPF has different sections but the assets and liabilities are not legally segregated. However, as far as permitted by law we use the mechanism of a ‘flexible apportionment agreement’ to notionally separate the CWPF sections for calculating the Section 75 debt. All employers agree to this when they join CWPF.
The intention is that you pay a Section 75 debt for each section you use plus any share of the ‘orphan liabilities’ for that section. For example - if you only use Pension Builder Classic, you do not have to pay any Section 75 debt for other CWPF sections. If you use more than one section, you will have to pay your Section 75 debt in each.
The calculation varies for each section. The estimated costs of your share of winding up the section is included in your Section 75 debt, but cessation costs are added on top.
Defined Benefit Scheme
The total debt is:
• the cost of buying deferred annuities for the members in your sub-pool, less the assets in your sub-pool
plus,
- your share of any shortfall of assets in the Life Risk Section calculated by reference to the cost of buying annuities for all the members in the
Life Risk Section plus,
- your share of the orphan liabilities (currently 0.4% of each employer’s buy-out liability).
Pension Builder Classic
The debt is your share of the estimated shortfall between the cost of securing all PB Classic benefits with an insurer, less the PB Classic assets.
Pension Builder 2014
The debt is the employer’s share of the estimated shortfall between the cost of securing all PB 2014 benefits with an insurer, less the PB 2014 assets.
Can we find out what our current Section 75 debt might be?
We include an estimate of your Section 75 debt with your valuation report every 3 years.
You can ask for an up-to-date figure between valuations, but this work is complex, so you will need to meet the actuary’s fees.
The fee currently starts at £1,800 and increases if you have more than 5 members.
This is the fee per section. If you have used the Defined Benefit Section and Pension Builder Classic, you must pay two sets of fees.
What are orphan liabilities?
‘Orphan liabilities’ are liabilities in respect of members whose benefits accrued as a result of service with an employer that no longer participates in the scheme.
Most orphan liabilities arose in the past before the current Section 75 arrangements were in place (meaning employers left without being required to adequately fund for their members). Orphan liabilities may arise now if employers who leave are unable to meet their debt.
Any liability for ‘orphans’ is shared among the remaining participating employers by section.
Is it true, at least in theory, that we could become responsible for other employers’ liabilities?
Yes. CWPF operates on a ‘last man standing’ basis. This means that if an employer leaves CWPF and is unable to pay its Section 75 debt, any remaining unfunded liabilities are shared between the remaining employers.
What is a ‘last man standing’ scheme?
CWPF is a last man standing scheme. There is no option or requirement to segregate assets when a participating employer leaves.
When an employer leaves, it pays a Section 75 debt. However, if the employer is unable to meet those costs, or if that employers pays but subsequent financial experience of the scheme is unfavourable, the responsibility for those pension liabilities passes to the remaining employers. In theory this could keep happening until only one employer is left.
How long do we have to pay the debt?
Unfortunately, there is nothing in the regulations that allows us to delay payment or spread the amount over instalments unless we agree a deferred debt arrangement, or you have applied for a ‘relevant transfer deduction’.
If you trigger a debt and do not apply for a period of grace, or we cannot defer your debt, you need to pay it straight away.
Do we have to pay a share of any deficit in other CWPF sections?
No. We have ‘flexible apportionment agreements’ which notionally separates all CWPF sections. All employers agree to this when they join CWPF.
You only pay a share of the buy-out deficit in the sections you use. For example, if you only use PB Classic, you do not have to pay a share of any buy-out deficit in the DBS or PB 2014. If you use more than one section, you will have to pay your share of any buy-out deficit in each.
Can a member transfer out after we trigger a debt?
Yes, they still have the right to move their pension to another provider.
Individual or bulk transfers
If members would like to transfer their benefits, or you intend to bulk transfer members to another pension scheme, you can choose to reduce your Section 75 debt through a ‘relevant transfer deduction’.
This suspends the section 75 debt process while we wait for the relevant transfers to be completed. Once liabilities are transferred out, this should reduce the Section 75 debt. You need to let us know if you want to do this and any transfers need to take place within 12 months.
Application to strike off a company
If you intend to strike off a company, before doing this with Companies House, you must settle your Section 75 debt from the companies assets. If assets are distributed before settling a Section 75 debt, we will object to the application to strike off.
If you are looking to strike off a company, please speak to us as soon as possible. We can work with you to find the best solution for your Section 75 debt.