On 17 September 2009, the Department for Work and Pensions (DWP) published a consultation paper on the draft Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2010 (the Amending Regulations).

The Amending Regulations make a number of amendments to the Occupational Pension Schemes (Employer Debt) Regulations 2005 (S.I. 2005/678) (the Employer Debt Regulations), the aim being to assist legitimate corporate activity without undermining protection of employees’ benefits in multi-employer defined benefit (final salary) schemes.

As we explained in our April 2008 briefing, “Amendments to the Employer Debt Regulations and the triggering of Section 75 Debts”, and our June 2009 briefing “Latest update on clearance and moral hazard”, a statutory debt is triggered under section 75 of the Pensions Act 1995 (a Section 75 Debt) in certain specific circumstances, including where an occupational pension scheme starts winding up or where a sponsoring employer enters insolvency. In addition, a Section 75 Debt arises in a multi-employer scheme when an “employment-cessation event” occurs. Under the Employer Debt Regulations, an employment-cessation event occurs where an employer ceases to employ active members at a time when at least one other employer in the scheme continues to do so. The principal change under the Amending Regulations is that the definition of “employment-cessation event” will be altered so that an employer debt will not arise as a result of certain corporate restructurings.

Two new mechanisms are proposed:

General easement - under this general easement no Section 75 Debt would be triggered if:

  • the trustees are satisfied that the exiting employer and the receiving employer meet the “restructuring test”. Broadly, this requires the trustees to consider whether the receiving employer will be “at least as likely” as the exiting employer to meet the scheme liabilities acquired from the exiting employer, as well as its own;
  • neither the exiting employer nor the receiving employer may be insolvent. In addition, the exiting employer must be satisfied that an insolvency event would be unlikely to occur within 12 months if the restructuring does not occur; the receiving employer must be satisfied that an insolvency event would be unlikely to occur within 12 months if the restructuring does occur;
  • the corporate assets and the employees of the exiting employer must be passed to another employer in the group. The receiving employer must take on responsibility for the exiting employer’s obligations towards the pensions scheme; and

the receiving employer’s head office must be in the UK.

De minimis easement - this easement is intended to apply where a small scale restructuring is undertaken. There is no restructuring test to be satisfied. Instead, the four conditions below must be satisfied in order for the de minimis easement to apply and a Section 75 Debt not to be triggered:

  • the scheme’s assets must exceed its liabilities measured on the Pension Protection Fund basis (under section 179 of the Pensions Act 2004);
  • the number of defined benefit scheme members in service with the exiting employer must be less than 2 per cent of the total number of defined benefit scheme members;
  • the liabilities of the exiting employer must not exceed £100,000; and
  • in a rolling period of 3 years, no more than 5 per cent of scheme members may be included in such transactions.

Under this mechanism, as under the general easement process, the exiting employer and the receiving employer must give assurances as to their current and expected solvency status over the following year.

The consultation closes on 19 November 2009 and the Amending Regulations are expected to come into force in April 2010 by which time it is thought that the Pensions Regulator (TPR) will also have provided guidance in relation to the proposed new easements. The DWP estimates that the proposals could help up to 50 per cent of corporate restructurings and that the proposals would mean an end to employers in well-run multiple employer schemes being required to meet a Section 75 Debt if they are planning to restructure - provided the prescribed circumstances and conditions are met.

View the consultation paper and the Draft Regulations.

Comment: the DWP’s aim to make the existing Employer Debt Regulations easier to apply in practice is welcome. However, there is concern that the proposed changes will affect only a limited number of transactions and that many proposed transfers may fail one or more of the many tests outlined in the Amending Regulations.

The requirement that the exiting employer ceases to employ active members on the same date as the transfer of assets, employees and pensions liabilities to the receiving employer may be difficult to comply with in practice. We can foresee problems where, within a group of companies, a restructuring will have to be artificially structured to comply with the requirements of the easements.

While guidance from the Regulator should be available, the restructuring test for the general easement frequently will require a certain amount of negotiation with, and provision of information to, the scheme trustees. In particular, the trustees will have to consider and receive advice on any liabilities which cannot legally be passed to the receiving employer, which may comprise a complex set of facts for trustees to assimilate within a short period of time.

The de minimis easement condition that the pension scheme members employed by the exiting employer make up less than 2 per cent of the scheme's total membership will surely mean that few smaller schemes will be able to take advantage of this provision.

There is also concern that these highly prescriptive amendment provisions further complicate an area that is already administratively complex and that members could raise challenges as to whether trustees have properly applied the restructuring test.