27 March 2020

The Rise of Regulated Apportionment Arrangements

RAAs are a statutory restructuring mechanism which operate by apportioning the departing employer’s share of liability between it and remaining employers. As an RAA can be entered before the insolvency process is initiated, RAAs can permit corporate restructuring in response to financial hardship without triggering the departing employer’s insolvency.

As the economic consequences of the COVID-19 crisis develop, many employers will encounter severe financial difficulties and increased insolvency risk. As one response to an employer’s probable insolvency, RAAs may become an increasingly common feature of the pensions landscape. RAAs are intended to provide a better return to a pension scheme than the alternative of insolvency (usually by a payment from a third party). As such, even though entering an RAA is a difficult decision for trustees, in the right circumstances it may be in the interests of members.

Statutory conditions to enter an RAA

An RAA may be entered into if statutory conditions are met:

  • The scheme must be in a PPF assessment period following an employer’s insolvency, or there must be a ‘reasonable likelihood’ in the opinion of scheme trustees that the scheme will enter an assessment period within the following 12 months;
  • The scheme rules must provide for an RAA. This is unlikely to be the case for many schemes, which would require amendments to scheme rules to introduce the necessary power; and
  • The Regulator must approve the arrangements and it is also required that the PPF does not object. The Regulator may require in practice trustees to seek regulatory clearance in respect of anti-avoidance considerations as a condition of consent.

The Pensions Schemes Bill

The Pension Schemes Bill is in its later stages, but progress through Parliament has been delayed until after Easter by emergency health legislation introduced in response to the COVID-19 epidemic.

When it passes, the Bill will introduce a package of strengthened regulatory powers including new criminal offences of avoiding a s.75 employer debt and engaging in conduct that risks accrued scheme benefits. The two offences will result in up to seven years’ imprisonment and/or civil penalties up to £1 million, and may be committed by any person – including an individual acting in their personal capacity as trustee.

Trustees faced with a likely employer insolvency may see RAAs as an attractive option, especially given the criminal sanctions to be introduced by the Bill. The prescribed statutory process for RAAs reduces trustees’ decision-making discretion, which effectively reduces the scope for trustees to make decisions which may result in criminal liability.

Burges Salmon has advised a wide range of trustee and corporate clients in connection with RAAs, and can provide insight into how to approach RAAs in an effective and efficient way.

Our pensions team is ready to offer advice to all during these testing times. If you have questions about RAAs or any other regulatory pensions matters, please contact Clive Pugh or your usual Burges Salmon contact.

Key contact

Clive Pugh

Clive Pugh Partner

  • Pensions Regulatory
  • Pensions Services
  • Pensions Legal Advice 

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