DWP consults on amendments to the employer-debt regulations

The Department for Work and Pensions (DWP) is consulting on limited proposals to prevent a section 75 debt being triggered in some corporate restructurings that involve a receiving employer (which has its head office in the UK) and an exiting employer. Under the proposals the receiving employer will have to enter into a legally enforceable agreement to take over the exiting employer’s employees, assets and liabilities. The DWP’s consultation paper contains draft regulations that would amend the employer-debt regulations 2005 (the regulations that underpin section 75 of the Pensions Act 1995).

The second part of the draft regulations contain technical amendments intended to clarify the government’s policy intention behind the employer-debt regulations 2005.

Background

In the consultation paper, the government comments that there are circumstances where it is inappropriate for a section 75 debt to be triggered in a corporate restructuring and that it intends to “introduce greater flexibility for employers, whilst at the same time maintaining member protection”.

The draft regulations contain a “general easement” and “de minimis easement”. These easements provide that in some limited circumstances it will not be treated as an “employment cessation event” if an employer stops to employ its last active member in a multi-employer pension scheme and others in its corporate group still employ active members. A section 75 debt will not be triggered where the easements apply.

When would the easements apply?

If enacted, these two easements only apply where a UK “receiving employer” that is participating in the multi-employer scheme and has at least one active member uses a legally enforceable agreement to take over the:

  • responsibility of all the “exiting employer’s” assets for which the receiving employer can legally take over; and
  • all the exiting employer’s employees; and
  • all the scheme members that are attributable to the exiting employer; and
  • all the exiting employer’s scheme liabilities (including any scheme funding liabilities under a schedule of contributions or recovery plan).

The above transfers must all take place on the same date.

Furthermore, the exiting and receiving employer must each decide whether they are reasonably satisfied that they have not themselves suffered an insolvency event and that an insolvency event is unlikely to occur in relation to them within 12 months of their decision.

The trustees and employers must take additional steps before they can rely on either the general or de minimis easement – see below.

General easement

To satisfy the general easement the trustees and employers are required to carry eight prescriptive steps, which amongst other things, require the trustees to be satisfied that the receiving employer will be “at least as likely” to meet the exiting employer’s scheme liabilities and their own liabilities – this is called the “restructuring test”.

The draft regulations also contain “moral hazard” provisions, which say that a section 75 debt will be triggered as normal on an employer-cessation event if “it becomes apparent” that the exiting/ receiving employer later became insolvent or the transfer agreement did not comply with all the requirements in the draft regulations.

De minimis easement

The de minimis easement is intended to apply where a small scale corporate restructuring is being undertaken. The trustees do not need to satisfy the restructuring test for the de minimis easement.

The de minimis easement provides that a section 75 debt will not be triggered if, amongst other things, the trustees are satisfied that:

  • the scheme is funded up to Pension Protection Fund protected levels; and
  • the number of scheme members that are attributable to the exiting employer is less than 2% of the scheme members; and
  • the exiting employer’s share of the PPF liabilities of the scheme is less than £100,000; and
  • in a rolling three year period less than 5% of scheme members become the responsibility of one or more receiving employer as a result of the restructuring.

Comment

The easements look generally helpful but the conditions are pretty prescriptive. As currently drafted they are not very flexible and raise a number of issues.

Under the proposals trustees still have a big role to play.

Technical amendments

The second part of the DWP’s consultation proposes technical amendments to the employer-debt regulations. Amongst other things, the DWP intends to make clear that a scheme apportionment arrangement can be used to apportion an existing employer’s debt on a floating (i.e. an amount to be determined later) or fixed basis (i.e. an amount determined at the applicable time but which may be payable at a later date) – previously there had been some doubt on this issue.

Further steps

The consultation is due to close on 19 November 2009.

Some changes to the draft amendments are likely as a result of the consultation.

The consultation paper says that the Pensions Regulator may provide good practice guidance on behaviours that it expects and practical advice on complying with the proposed exemptions.

http://www.dwp.gov.uk/consultations/