17 September 2009 – Flexibility and protection – Eagle – Section 75 Consultation launched today

Plans to make the employer debt rules more straightforward, which some claim stand in the way when businesses restructure, were announced today.

Minister of State for Pensions and the Ageing Society, Angela Eagle said:

"We want to help legitimate business activity without undermining protection of employees' pensions.  We need to get the balance between flexibility for employers and protection for employees, which is why we have been discussing our proposals with a range of interested parties, including the TUC and the CBI.  We estimate our main proposal could help up to 50 per cent of corporate restructurings.  I look forward to seeing the market response to this consultation."

The proposals follow on from an informal consultation started last November. They would mean an end to employers in well run multiple employer schemes being required to meet a debt if they were planning to restructure, provided prescribed circumstances and conditions are met.

The changes will not apply where a multi-employer scheme winds up, or the employer experiences an insolvency event. In these situations, the existing employer debt rules will continue to protect members’ benefits.

In addition to these changes, a number of other technical amendments are proposed to make the existing Employer Debt (Section 75) regulations work better in practice.

Notes to Editors:

1. The employer debt legislation sets out the requirements on employers where any shortfall between liabilities and assets (i.e. debts) in a defined benefit (DB) pension scheme is treated as due to be paid by the employer to the scheme. In the case of an under-funded DB multi-employer scheme, the debt becomes due from the employer where they exit the scheme through the occurrence of an "employment cessation event (ECE)”, or less commonly, where the scheme winds up or the employer becomes insolvent.
2. The main change is the introduction of two new arrangements into the employer debt regulations. The new arrangements will provide that, in the case of a corporate restructuring, an event which would otherwise be an ECE will not be treated as such if prescribed conditions are met. Hence no employer debt will arise.
3. Main restructuring easement - This option may be used by associated employers who are undertaking a corporate restructuring. No debt would be triggered provided the following conditions were satisfied:
   • A Restructuring Test - considering the present resources and future commercial prospects of the exiting and receiving employers - would have to be satisfied. Broadly, the Test requires that the receiving employer is at least as likely as the exiting employer to meet the scheme liabilities it is acquiring from the exiting employer, as well as its own liabilities.
   • The corporate assets and employees of the exiting employer must be passed to another employer remaining in the group (the “receiving employer”). The receiving employer also becomes responsible for the exiting employer’s obligations towards the pension scheme.
   • The receiving employer must have their head office in the UK.
4. In very limited circumstances, this option would be extended to include non-associated employers. It would apply where an employer changed its legal status, such that, for example an unincorporated charity changed to an incorporated company; or a partnership became a Limited Liability Partnership.
5. De-minimis easement - Under this option, de-minimis limits would be introduced, below which, in the case of a restructuring, an employer debt would not be triggered.  The underlying rationale is that the interests of the exiting employer qualifying for this easement are not material to the ongoing viability of the scheme.  The key features of this option would be as follows:
• The corporate assets and employees of the exiting employer must be passed to the receiving employer. The receiving employer also becomes responsible for the exiting employer’s obligations towards the pension scheme.
• The de-minimis would be calculated by reference to the protected liabilities of the pension scheme.
  • (i) The de-minimis would only apply where the scheme’s assets exceed protected liabilities when measured on a PPF (s179) basis.
  • (ii) The de-minimis would only apply if the pension scheme members of the exiting employer were no greater than 2 per cent of the scheme’s total membership.
  • (iii) These liabilities of the exiting employer (as proxy for the exiter’s interests in scheme) must not exceed £100,000.
  • (iv) The aggregate proportion for successive transactions under this option must not exceed 5 per cent of the scheme’s total membership in a rolling period of 3 years.
6. The consultation period begins on 17 September 2009 and runs until 19 November 2009. Comments on any aspect of the draft Regulations are welcome. This document is available on the Department’s website at http://www.dwp.gov.uk/consultations/2009/

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