On 15 March the Department for Work and Pensions (DWP) published its response to its consultation on amendments to the so-called "section 75 debt" regime, alongside the final-form amending regulations themselves. The regulations will come into force on 6 April 2010, and will be relevant where employers cease to have active members in a defined benefit pension scheme from that date.
The primary focus of these regulations continues to be the easements applicable to internal restructurings. However, the draft regulations also contained many technical amendments designed to make the existing regime easier to operate in practice. Unfortunately, many of these technical amendments (including certain much-anticipated clarifications) are absent from the final regulations.
Broadly, a section 75 debt becomes due from an employer to the trustees of a defined benefit pension scheme where that employer ceases to employ any employees in active membership of that scheme. This can happen in a range of circumstances including on a sale of a subsidiary or on an internal reorganisation where the employer transfers all of its employees to another group company; it can also happen unintentionally when an employer's last employee who happens to be an active member of the scheme leaves, retires or dies. The amount of the debt owed is the cessation employer's share of the scheme's deficit calculated on the full buy-out basis.
However, it is possible for employers to avoid paying the section 75 debt immediately in full (for example, through scheme apportionment arrangements or withdrawal arrangements). In September 2009 the DWP consulted on the potential introduction of two further easements, the effect of which would be to prevent a section 75 debt from being triggered on certain corporate restructurings involving one-to-one employer transfers:
- A "general easement". The DWP proposed an eight step procedure broadly contingent on there being no weakening of the employer covenant ( the "restructuring test").
- A "de minimis easement". The DWP proposed a six step procedure which would exempt certain very small restructurings from triggering a section 75 debt.
The draft regulations also contained some technical amendments designed to clarify certain issues arising out of the 2008 amendments to the section 75 regime.
The draft regulations were reviewed in our bulletin here.
For more detail on the application of the section 75 debt regime generally, please see our microsite page here.
The new regulations: key points
Overall, the regulations contain many helpful amendments in relation to the operation of the new general and de minimis easements.
In relation to both easements:
- The requirement, applicable to both easements, for the receiving employer to have its head office in the UK has been dropped.
- However, the DWP has confirmed that the easements will only apply to one-to-one transactions; though they also point out in their response to consultation that there is no limit on the number of one-to-one transactions which can be undertaken by employers for the general easement. The DWP has removed the requirement for the assets/liabilities/employees/members to transfer on the same day in order "to provide additional flexibility for employers".
- The 12 week longstop deadline for the transfer to take place (i.e. 12 weeks from the date that the trustees have confirmed to the exiting employer that the restructuring or de minimis tests have been met) has been extended to 18 weeks (with the possibility of a further 18 week extension, subject to trustee agreement).
- There will be a cut-off date (six years from the date of the completion of the restructuring), after which no debt can arise due to the restructuring. This will provide helpful certainty on subsequent corporate disposals.
- However, a section 75 debt will be triggered if it becomes apparent that not all assets, employees, scheme members or liabilities have been transferred within six years of the restructuring or if the employers have failed to confirm that the transfer of assets, etc, has been completed within that timeframe.
- The requirement for the employers to confirm that an insolvency event has not occurred/is unlikely to occur in relation to them within 12 months (if a restructuring takes place) has been dropped. This was a "step" in relation to each easement; consequently, the general easement under the final regulations comprises seven steps and the de minimis easement now comprises five steps.
- Orphan liabilities must be included in the calculation of liabilities. This may mean that both employers will have to calculate their notional employer debts, thus adding costs to the process of using the easements.
- Minor infractions will not unravel the easement. Again, this is helpful as the process is prescriptive; this new provision means that a trivial breach will not trigger a section 75 debt.
- The trustees may require the exiting and receiving employers to meet the costs arising from the easements.
Specifically in relation to the general easement:
- Employers will be required to provide information to the trustees for the purposes of the restructuring test.
- Where incorrect or incomplete information is provided by the employers (and this information would have been material to the trustees' decision), an employment cessation event occurs.
- The formal requirement for trustees to seek professional advice has been dropped from the final version of the regulations.
- The requirement for the Regulator to be notified of the decision has been dropped. The DWP also confirms that formal applications for clearance are inappropriate.
- The restructuring test is amended to require the trustees to consider the effect of the restructuring on the employer covenant.
Specifically in relation to the de minimis easement:
- The scheme members in respect of whom defined benefits have accrued as a result of service with the exiting employer must now either be (i) no more than two members; or (ii) no more than 3% of scheme membership, whichever is the greater.
- The total annual amount of accrued pensions of the members covered by the transaction must not exceed £20,000 (to be increased by £500 each year).
- In a rolling period of three years, de minimis transactions in a scheme must involve no more than five members (or 7.5% of scheme members – whichever is the larger); and the total amount of accrued pensions in respect of these members must not exceed £50,000.
Technical amendments (not relating to either easement):
As noted above, the September 2009 draft regulations also contained some technical amendments designed to ease the operation of the section 75 debt regime in practice. However, the DWP has removed many of these amendments due to "a divergence of views amongst practitioners" and the fact that "additional work will be needed" to address all of the issues raised. This complex area "deserves closer consideration to ensure any regulations introduced are robustly tested and member protection is not adversely affected".
Whilst the absence of certain technical amendments will not necessarily change how the regime is interpreted and operated in practice, the formal clarification of certain points (for example, that a scheme apportionment arrangement can provide for a sum to be apportioned on a fixed or floating basis) would have been welcome.
Notwithstanding the many helpful amendments in relation to the operation of the two new easements, many employers will still prefer to use more flexible ways of dealing with section 75 debts (for example, scheme apportionment arrangements). However, it is worth noting that the new easements require the trustees to apply (mainly) objective tests (the restructuring and de minimis tests), whereas scheme apportionment arrangements require trustees' consent. This subtle distinction may mean that these new easements are used in practice, despite their prescriptive nature.