The DWP has launched a 53-page consultation document on proposed changes to the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678, as amended by seven later SIs already). Snappily titled The Occupational Pension Schemes (Employer Debt)(Amendment) and Pension Protection Fund (Multi-Employer and Entry Rules)(Amendment) Regulations 2007, these latest changes (which take up half the condoc)* aim to make the regulations easier to operate, more flexible and provide better protection for scheme members.

* see also update at foot of this article

Section 75 of the Pensions Act 1995 (NB. this section has been heavily modified, in particular by PA 2004 s.271) places a debt on an employer where a scheme has commenced winding-up, the employer has an insolvency event or in the case of a multi-employer scheme, the employer withdraws from the pension scheme. The Employer Debt Regulations set out the requirements on employers where a debt is treated as due. The employer's debt is calculated at full buy-out level (ie. the level an actuary judges appropriate to buy out the benefits through the annuities market).

The current Employer Debt Regulations make provision for an employer in a multi-employer scheme to not pay the full debt but instead enter into an Approved Withdrawal Arrangement. These arrangements allow an amount less than full buy out to be paid provided there is a guarantee up to the full buy out level. They must be approved by the Pensions Regulator. In many multi-employer schemes, which have the appropriate rule, there is the option of apportionment. In such cases the employer exits a multi-employer scheme with his debt apportioned to the remaining employers in accordance with the rules of the scheme.

The application of section 75 and the Regs has created many problems for pension schemes and their advisers. The De-Regulatory Review) made a number of recommendations for changes. Further impetus came from the case of L v M [2006] EWHC 3395 (ch). This case concerned the interaction between apportionment of Employer Debt and the Pensions Protection Fund (PPF). An eligible scheme is barred from the PPF if the trustees have entered into a legally enforceable agreement to reduce the amount of a recoverable Employer Debt. The judge in this case was asked to rule on a proposal to use apportionment to get around this. The employer ('M') was in financial difficulties and looking to restructure. This involved creation of a new participating employer ('Newco'). The plan then went like this:

1. Amend scheme rules to apportion M's Employer Debt: M to pay £1 and Newco the balance;
2. Trigger scheme wind-up, and thus the Employer Debt as apportioned;
3. M pays its debt of £1, thereby releasing it from responsibility for the scheme;
4. Newco, having no money to pay its debt, goes into insolvency; and so
5. The scheme enters the PPF.

Warren J in essence decided that this was OK. However, he did make some very critical comments on the quality of the drafting of the legislation, as well as highlighting inconsistency between the Employer Debt Regs and the PPF Entry Rules. The DWP has taken this judgement into account in preparing the new regs.

The Amending Regulations make many amendments, in particular to:

• the operation of Approved Withdrawal Arrangements (a new simplified form called a Cessation Agreement is introduced) and the test used by the Regulator when approving them;
• the definition of employment-cessation events; and
• the operation of apportionments of scheme shortfalls in multi-employer schemes.

An apportionment share must be set out in either a Scheme Apportionment Arrangement or, rarely, a Regulated Apportionment Arrangement*. The aim is to frustrate any attempts to use apportionment as a method to abandon a scheme**, whilst retaining its flexibility for employers in corporate transactions and restructurings. The DWP's policy intention is that trustees or managers should not agree to an Scheme Apportionment Arrangement unless they are satisfied that the remaining employers in the scheme do intend to bear the debt in the future and are, and will continue to be, capable of doing so. In other words, the aim is to prevent debt being apportioned to weak employers or shell employers, whilst allowing maximum scope for apportionment in corporate restructurings and reorganisations.

* This is an arrangement which the Regulator approves and the PPF has agreed to. These arrangements are not expected to be used very often. A Regulated Apportionment Arrangement will apply where the trustees are satisfied that it is likely the scheme will enter into an assessment period in the next 12 months. The Regulator may approve such an arrangement if it is of the opinion that the arrangement will result in better funding for the scheme than if an insolvency event occurred in relation to one of the employers.

** Note: The Regulator recently issued guidance for trustees on the subject of abandonment (May 2007).

The DWP has also clarified that where the employer participates in a multi-employer scheme and offers money purchase benefits only, he will not be included as an employer for the purposes of the Employer Debt Regulations. Section 75 was and is not intended to apply to money purchase benefits.

Finally, the DWP says it is aware of some dissatisfaction with the tax treatment of payments by Guarantors under Approval Withdrawal Arrangements, and intends to discuss this with HMRC separately.

The consultation period began on 7 August and runs until 1 October; the Government hopes to bring the amending regs into force in December 2007.

Update 13 August 2007