Changes to section 75 of the Pensions Act 1995
The DWP intends to issue draft regulations which will amend the regime governing "section 75 debts" (payable when a company ceases to have active members in a defined benefit pension scheme; for example, on the sale of a subsidiary or on an internal reorganisation where members are TUPE transferred to a new employer). It is expected that there will be a consultation period, with the new regulations due to take effect at the beginning of December 2007.
As yet, the DWP have not given any public indications of their likely content, but we understand that the intention is to rectify some of the perceived shortcomings of the current legislation. There are likely to be transitional issues affecting transactions which span the consultation period and the effective date of the changes. We will issue a further e-bulletin when these new regulations have been published.
Update to the Regulator's guidance on the clearance procedure
The Pensions Regulator intends to publish an update to its clearance guidance over the Summer. This will be a follow-up to its clearance "reminder" issued in May this year. This stated that, where there is a significant weakening of the employer covenant (for example, on a highly leveraged transaction and/or where the assets to which the scheme currently has recourse are being removed from the employer group) then "clearance is an appropriate consideration irrespective of the funding position of the scheme."
In its reminder, the Regulator also stated that, in these types of circumstances, the scheme's trustees should "consider whether to seek a materially enhanced level of mitigation in excess of FRS 17/IAS 19." However, the Regulator did not indicate what level of funding might equate to a "materially enhanced level".
The Regulator's statement is relevant on highly leveraged transactions, even where the parties decide not to seek formal clearance. Parties to such transactions are at the very least likely to have to negotiate with the trustees of the affected scheme, notwithstanding that the scheme may be well funded on an IAS 19 basis. In such negotiations, the trustees are likely to seek additional funding at a level between IAS 19 and full buy-out; or better security, perhaps in the form of a company guarantee.
It is expected that the upcoming clearance update will expand on the Regulator's position.