When the employer debt provisions were last revised, in April 2008, many employers were concerned that the rules placed unnecessary barriers to corporate restructuring. Essentially, the current rules require an employer which ceases to participate in a defined benefit pension scheme to immediately pay its share of any shortfall between scheme assets and liabilities on a full buy out basis. Current regulations allow the debt to be apportioned to other participating employers or for part of the liability to be transferred by means of a withdrawal arrangement. Under the new proposals, where there is a corporate restructuring and one employer's assets and pension liabilities are transferred to another, then as long as the prescribed steps are followed, no debt will arise at all. The DWP states that the proposals "are consistent with our two key considerations of maintaining member protection and helping employers restructure".
Not a complete answer for restructurings
The proposals do provide some assistance for corporate group restructurings. As long as the procedures are followed there will be no crystallisation of the employer debt in purely internal reorganisations. One major limitation is that it will only apply to one-to-one transfers. Where one company's assets and liabilities are to be split between a number of companies then a debt will still be triggered - the DWP are consulting further on whether a multiple transaction within a single group of companies should also be subject to the easement and what additional safeguards would be required. One issue under consideration is whether sufficient protection could be provided to members if all employers involved in the restructuring were to provide a legally binding guarantee.
One area where the new easements will be of great benefit is where an employer changes its legal status. Common examples of this are an unincorporated charity becoming a company and a partnership becoming an LLP. Under the current regulations a debt may be triggered in these circumstances. Once the new provisions are in force the easements will apply.
Circumstances when the general easement will apply
The easement will apply and therefore no debt will trigger where there is a corporate restructuring and each of the 8 steps has been completed (see table). It will apply to one-to-one transactions or to transactions where there are a number of exiting employers and one receiving employer (as long as each step is completed for each employer). The exiting and receiving employer must be participating in the same defined benefit pension scheme and in most circumstances must be associated. The easement will also apply where an employer is undergoing a change in legal status. Each step can only be carried out once the previous one has been completed.
The 8 steps to an easement
Step 1 Exiting employer writes to the trustees
Step 2 Trustees must, with regard to Step 3
- consult with the exiting employer
- consult with the receiving employer (if it exists)
- consider whether to take professional advice
Step 3 The trustees must decide whether they are satisfied that, after Step 7, the receiving employer will be at least as likely
- as the exiting employer to meet its liabilities to the scheme; and
- to meet it's own liabilities to the scheme
This is referred to as the "restructuring test".
Step 4 Trustees send the exiting employer their Step 3 decision
Step 5 * The receiving employer must be satisfied that an insolvency event
- has not occurred in relation to it, and
- would be unlikely to occur within 12 months of the restructuring
The exiting employer must be satisfied that an insolvency event
- has not occurred in relation to it, and
- would be unlikely to occur within 12 months if a restructuring does not go ahead
Step 6 The exiting employer and receiving employer send the trustees their decisions under Step 5
Step 7 * The receiving employer takes over responsibility, under a legally enforceable agreement, for
- the exiting employer's assets
- the exiting employer's employees
- scheme members with pensionable service with the exiting employer
- scheme liabilities attributable to the exiting employer
on the same date. This must be within 12 weeks of the date of the Step 4 written decision
Step 8 The exiting employer and receiving employer send the trustees written confirmation that Step 7 has been carried out
* Where, after the restructuring, it becomes apparent that Step 5 or Step 7 has not been properly carried out, then the easement will not apply and the exiting employer and receiving employer will be jointly and severally liable for the debt arising
Simplified easement for small scale restructurings
As well as the general easement the new provisions will allow small scale restructurings to take place without an employer debt being triggered. This will apply where the trustees are satisfied that:
- the assets of the scheme are at least equal to the protected liabilities as shown on the most recent section 179 (PPF) valuation
- less than 2% of the scheme members must have had pensionable service with the exiting employer
- the liabilities relating to the relevant members must not exceed a prescribed sum
- no more than 5% of scheme members can be included in transactions subject to this easement in any rolling three year period
There are also a number of disclosure and reporting requirements which must be followed by the trustees and employers.
For the full consultation paper click here