The Department for Work and Pensions has issued an informal consultation with limited circulation on making changes to the employer debt regime. Contrary to some press reports, the intention is not to weaken the protection for pension schemes under section 75 of the Pensions Act 1995 but rather to relax the requirements only in the context of corporate restructuring where the employer covenant was strong before the restructuring and there is no detrimental effect or weakening of the covenant afterwards.
The Department for Work and Pensions has issued an informal consultation (described as a "discussion paper") to a limited number of recipients on making changes to the employer debt regime under section 75 of the Pensions Act 1995. This consultation closes on 5 December 2008. Initial press reports suggested that the proposed changes could weaken protection for DB schemes. However, the changes are intended to apply only to an internal reorganisation/ corporate restructuring where the employer covenant was strong before the restructuring and there is no detrimental effect or weakening of the covenant after the restructuring and no increased risk to the PPF.
The informal consultation follows the 2007 Deregulatory Review, which recommended: “Where there is a group reconstruction of employers in a multi-employer scheme, the principle should be established that the debt should not be triggered where the original covenant was strong, and if the remaining employers' covenant remains as strong, following the reconstruction, as the original covenant”. The informal consultation suggests four options to help address concerns about section 75 debts being triggered in corporate restructuring, though the DWP states that it is open to further suggestions:
- Scheme apportionment as the default – allowing the employer debt to be automatically apportioned where there is a merger or acquisition within the existing corporate group. Under this proposal it would still be necessary to satisfy the funding test and all the other conditions for a scheme apportionment arrangement, but the apportionment of the debt otherwise triggered on the exiting employer would be automatic rather than having to be negotiated with the trustees. However, the trustees would have to be informed and be satisfied that the already strong covenant was not weakened. If they were not satisfied, the full buyout debt would be triggered under the employer debt regulations.
- A de minimis threshold – a section 75 debt would be triggered only if it exceeded a fixed percentage of total scheme liabilities. Views are sought on an appropriate threshold.
- Reducing the outgoing employer’s debt – either to the scheme-specific funding level or to PPF level in certain circumstances (instead of the buyout level).
- Do nothing – make no changes to the current employer debt legislation.
A formal consultation may follow if this exercise gives rise to any firm proposals and draft regulations.