The Department for Work and Pensions (DWP) has completed its consultation on proposed changes to the regulations governing the amount an employer is required to pay on ceasing to participate in a defined benefit pension scheme. Likely amendments to The Occupational Pension Scheme (Employer Debt) Regulations 2005 will, from the end of this year, offer additional but limited options to companies and corporate groups that have triggered an employer debt on a restructuring or corporate transaction.

Background

Where an employer debt has been triggered under section 75A of the Pensions Act 1995, the Employer Debt Regulations sets out various ways in which that liability may be dealt with. The aim of the regulations is to ensure that scheme members’ benefits are properly funded when their employer ceases to participate in a defined benefit pension scheme.

The regulations have been subject to criticism from corporate groups for a perceived lack of flexibility when restructuring a group or on corporate transactions. Previous attempts at amending the regulations in April 2010 introduced new methods of dealing with section 75 debt but have been rarely used, largely due to the prescriptive and restrictive nature of the conditions to be met.

The New Regulations

Following pressure from the pensions industry, a consultation paper on employer debt was published by the DWP in June 2011. Draft regulations propose the introduction of additional flexibility in dealing with employer debt triggered by corporate restructuring. As well as a number of technical amendments, two new procedures are proposed to assist corporate groups dealing with restructuring and corporate transactions.

The Flexible Apportionment Arrangement

The proposed new Flexible Apportionment Arrangement (FAA) will provide a further mechanism for dealing with corporate restructuring and transactions. It allows the liabilities of a departing employer to be reapportioned to a remaining sponsoring employer (or employers) without a section 75 debt being triggered. Effectively the remaining employer(s) assume all the liabilities of the departing employer which means that there will be no need for the amount of the debt to be certified. Certain conditions will apply in order for the arrangement to be effective:

The current funding test, which must be satisfied for scheme apportionment arrangements under the existing regulations, must still be met. The Trustees must be satisfied that the employer(s) is able to fund the scheme on the current funding basis, and that the arrangement does not weaken the employer covenant such that the security of members’ benefits is reduced.

The trustees and the employers involved must agree to the arrangement. The whole of the departing employer’s liabilities must be apportioned to the remaining employer(s).

Where an employment cessation event occurs – ie when an employer ceases to employ active members whilst at least one other employer continues to do so – no part of the debt has already been paid before the FAA can be entered into.

The scheme is not in a PPF assessment period and it is unlikely that one will commence within the next 12 months.

To allow further flexibility in situations where two arrangements are entered into within a short period of time, the new regulations will allow trustees to agree that the funding test has been met in respect of the latest arrangement and therefore the test need not be carried out again.

Extended Grace Period

Under the existing regulations,  if an employer ceases to employ any active members and therefore an employment cessation event occurs, but intends to employ an active member within the next 12 months, the employer may give the trustees a notice called a ‘period of grace’ notice. The notice must be given to the trustees before, on or as soon as possible (and in any event within one month) after the employment cessation event. The effect of the notice is that the employer will be treated as if they were still an employer of active members during the period of grace, and no debt will be treated as having occurred.

The period of grace begins when the employer ceases to employ active members and ends 12 months later or, if earlier, the date the employer employs an active member of the scheme. If the employer employs an active member during the period of grace, the employer will be treated as if the relevant employment cessation event had not occurred. If the employer does not employ an active member within the grace period, the debt will be triggered.

The proposed new regulations will allow the trustees of the scheme concerned, following an employment cessation event, to extend the period during which the employer can employ another active member without triggering the section 75 debt from 12 months to 36 months.

Conclusion

The new measures for dealing with corporate restructuring and transactions appear to offer little by way of a change in the approach to dealing with withdrawal from defined benefit pension schemes. An FAA may offer some increased flexibility to corporate groups but seem little different in practical terms to options available under the existing regulations.

In addition, whilst the proposal is to extend to two months the notice required to take advantage of a grace period, which still requires the employer to commit to employing a new active member within an impractically short timeframe.

The consultation period ended on 10 August with the new regulations due to come into effect from 1 October 2011.