The DWP has launched a four week informal consultation on making changes to the employer debt regime under section 75 of the Pensions Act 1995. Media reports yesterday suggested that, under these proposals, the protection for schemes may be weakened.

However, the suggestions canvassed in the consultation are far more narrow than the media reports (based on the Minister’s speech) suggested. They are intended to apply only to a corporate restructuring where the employer covenant was strong before the restructuring and there is no detrimental effect/ weakening of that covenant following the restructuring.

Background

The DWP’s informal consultation follows the 2007 independent Deregulatory Review carried out by Chris Lewin and Ed Sweeney which recommended that: “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 remains as strong, following the reconstruction, as the original covenant”.

In its response to the deregulatory review, the government indicated that it would seek further views from the industry.

Proposals under review In its informal consultation sent yesterday to selected bodies. the DWP suggests four options to help address concerns about section 75 debts being triggered in corporate restructuring.

  1. 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, the funding test would still need to be met but provided it is, the apportionment of the debt otherwise triggered on the exiting employer would be automatic rather than negotiated with the trustees.
  2. A de minimis threshold – so that a section 75 debt will only be triggered if it exceeds a fixed percentage of total scheme liabilities. Views are sought as to an appropriate threshold.
  3. Reducing the exiting employer’s debt - to PPF or scheme specific funding level in certain circumstances (in place of the usual buy-out level).
  4. Do nothing - make no changes to the current employer debt regime.

Limits of proposals

The informal consultation makes it clear any revised regime is only intended to be available to employers who have a strong covenant and who, in reorganising their businesses, would not cause detriment to their pension schemes or that covenant. They are not intended to prohibit intervention by the Pensions Regulator where there is a detrimental impact on the pension scheme.

Next steps

We understand from press reports that the DWP intends for there to be a full public consultation in February 2009 with changes (if any) being made in October 2009.