In our September 2009 pensions update, we set out the proposed detail of the new easement procedures in relation to employer debt and reported on the consultation paper published by the Department for Work and Pensions (DWP) on the draft Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2010 (the Amending Regulations). The finalised Amending Regulations have been laid before Parliament and the amendments come into effect on 6 April 2010, providing to employers of under-funded final salary schemes new options for managing the employer debt under section 75 of the Pensions Act 1995 (Section 75 Debt).
From 6 April 2010, the Amending Regulations set out two new options for employers which will allow corporate restructuring transactions without triggering an employment-cessation event and a Section 75 Debt:
- A “general easement” will apply to transactions where the assets of the exiting employer are transferred to a single receiving employer, involving a 7-step procedure, a key element of which is the restructuring test. Broadly, it requires that trustees satisfy themselves that the receiving employer is “at least as likely” as the exiting employer to meet the scheme liabilities it is acquiring from the departing employer, as well as its own; and
- A “de minimis easement” is designed to apply to small restructurings and involves a 5-step procedure, and no restructuring test. Trustees must satisfy themselves that four conditions are met:
- The assets of the scheme are at least equal to its section 179 liabilities (that is, the cost of securing liabilities at Pension Protection Fund (PPF) compensation levels).
- There are either no more than two members who have accrued benefits as a result of service with the exiting employer, or they are less than 3 per cent of the scheme’s defined benefit membership, whichever is greater.
- The total annual amount of accrued pensions of the exiting members must not exceed £20,000. This limit will increase by £500 for each subsequent tax year.
- A cap is imposed on the number of times the de minimis easement may be used. In a rolling period of three years - no more than the higher of five members or 7.5per cent of the scheme’s defined benefit membership can have been through the process. The total amount of accrued pension of these members must not exceed £50,000.
The consultation proposals were the result of industry concern that the employer debt regime was hindering corporate restructuring transactions, with employers concerned about the imposition of Section 75 Debt.