Paul Hamilton FIA, Partner and Head of Higher Education at Barnett Waddingham
The debt monitoring proposal
If an employer takes out some form of secured borrowing so that the repayments of that borrowing come ahead of other creditors, then in the absence of some form of mitigation, that could weaken the position of the pension scheme – because someone else has a right to money from the employer ahead of the scheme. In this situation, and if all the conditions proposed by the USS are satisfied, then under the proposal, the USS would ask for “pari passu” security from the trustee – i.e. to also get security from the employer so that the USS has the same access to cash from the employer as it had before. The security for the loan moves the USS down the priority list, and the new security is then designed to put the USS back into the position it was in before.
This is quite tricky to do accurately, but that is not the subject of this blog. Nor am I focusing on the impact on other pension schemes of the same USS employer – they would see the loan and also the USS get ahead of them in the priority list, unless they also look to put in place similar security.
For today, I am more interested in a small part of the consultation that looks at what happens if employers do not comply, where one option open to the USS would be to accelerate that employer’s contributions – i.e. increase that employer’s contribution rate above that paid by others.
Differential contributions in multi-employer schemes
The USS is a non-segregated multi-employer scheme. This means that there is no concept of separate assets held for each employer – the assets are all combined into one pool, and whilst it may be possible to notionally allocate a share of the assets to an employer for certain purposes, there are also situations where legislation tends to over-ride any notional asset allocation, and grant employers a “share of fund” – i.e. if the scheme is 90% funded, the each employer is allocated 90% of “their” liabilities, regardless of how much they have paid in themselves.
This means that while such schemes can ask for different contribution levels from different employers, there is no guarantee that employers that pay more in will get credit for any extra paid in. This is why, generally, such schemes have the same rate for all employers and don’t, for example, have different rates for different employers depending upon their own covenant.
The consultation says it is not trying to “undermine the ‘mutuality of covenant’ principal”, and in many ways having more controls that protect some employers from potential actions of other employers does help support the ongoing shared responsibility (albeit moving more towards enforcing, rather than trusting). But does even raising the concept of differential contributions open the door to a different decline in mutuality, where employers start to think more about whether they are getting “their fair share”? This would be a big step away from the current position of everyone paying the same.
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