The employer debt requirements of the Pensions Act 1995 are designed to ensure that solvent employers cannot walk away from their pension liabilities. A debt can be triggered on the insolvency of an employer, the winding up of a scheme or where an employer ceases to participate in a multi-employer scheme. The debt which arises in these situations is the deficit in the scheme on an annuity buy out basis which can run into many millions of pounds and has in some cases delayed or prevented corporate transactions.

Draft regulations have been issued proposing changes to the way in which employer debts are triggered, calculated and apportioned. The stated intention of the changes is to frustrate any attempts to use apportionment as a method to abandon a scheme whilst retaining flexibility for employers in corporate transactions and restructurings. The amendments generally affect only multi-employer schemes and are intended to come into force some time in December 2007 and will impact on events taking place on or after that date.

A key change is that a debt will in future be triggered immediately where all participating employers in a scheme cease to have active members simultaneously, for example if the scheme is closed to future accrual. Currently accrual can cease scheme-wide without triggering a debt. Similarly the simultaneous transfer of all staff on a merger or reorganisation will trigger a debt whereas currently it would not do so.

There will be five ways of dealing with the debt:

  • Liability share (the default position) - similar to the current position but with a different approach to assessing the liabilities attributable to each employer
  • Scheme apportionment share - an agreement between the trustees and employer, made before or after any debt arises, as to the amount of the employer’s share of the debt
  • Regulated apportionment share - an arrangement approved by the Regulator, allowing an apportionment of a smaller amount of debt in order to avoid employer insolvency
  • Withdrawal arrangement - similar to the present position but with a change to the test for Regulator approval
  • Cessation agreement - an agreement between the trustees, cessation employer and guarantors, entered into before or after the debt arises, intended to offer a simpler alternative to the withdrawal arrangement.

Some of the proposed changes may well assist in easing difficulties encountered under the current regime but may also throw up new problems. There are likely to be further changes as a result of the consultation process. Further details of the draft regulations and their potential impact can be found in our briefing Employer debt - proposed changes.