Last November the DWP conducted an informal, four-week review of the section 75 rules governing the application of a debt on the employer, in particular as they apply in the case of multi-employer schemes (s.75A PA 1995 and numerous regulations*).

* SI 2005/678, as amended in particular by SI 2008/731.

The employer debt legislation sets out the requirements on employers where any shortfall between liabilities and assets (ie debts) in a defined benefit (DB) pension scheme is treated as due to be paid by the employer to the scheme. As it stands, the law is widely viewed as a considerable impediment to corporate restructuring, and a growing and unnecessary additional burden on businesses trying to adapt to the recent economic downturn. An employer leaving a multi-employer scheme which is in deficit, leaving no active member*, has to pay at least part of the buyout cost in relation to their share of the liabilities. This applies even where companies are part of the same group, so that restructuring for good business reasons could trigger a requirement to pay more money into the pension scheme than would otherwise have been paid. In such situations, many have argued that this should not happen

* An "employment-cessation event" occurs when an employer loses its last active member and others in its multi-employer group still employ active defined benefit members. The occurrence of an employment cessation event normally triggers an employer debt.

In a new consultation launched this week, the Government accepts that there are circumstances where the triggering of an employer debt on a corporate restructuring is not appropriate. New draft regulations, which are the subject of this consultation, are aimed at introducing greater flexibility for employers, whilst at the same time maintaining member protection. The draft regs prescribe the circumstances in which an event whereby an employer loses its last active member will not be counted as an employment-cessation event and so no employer debt will be triggered.

Under the main restructuring easement, 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.

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.

De-minimis limits are proposed, 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.
  1. The de-minimis would only apply where the scheme's assets exceed protected liabilities when measured on a PPF (s179) basis.
  2. 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.
  3. These liabilities of the exiting employer (as proxy for the exiter's interests in scheme) must not exceed £100,000.
  4. 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.

As we noted in our report on the November 2008 consultation, it was always going to be tricky to balance the interests of business and member protection in a mutually satisfactory way. The Government found it would not be possible to apply the new arrangements to any kind of corporate restructuring activity and maintain adequate member safeguards, without increasing the complexity of the regulations (although even as it is, the draft amendments take up 17 pages of fairly small print). In particular there would be concern if, as part of a corporate restructuring, the corporate assets were passed to one employer but the liability for the employer debt was passed to another employer.

However, the new regs can be used for a number of one-to-one transactions in a multi-employer scheme; transactions where there are a number of exiting employers and a single receiving employer can also take place, provided each transaction is carried out on a one-to-one basis. Minister of State for Pensions and the Ageing Society, Angela Eagle estimates that up to 50 per cent of corporate restructurings could be assisted by these regs.

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 (SI 2005/678, as amended) work better in practice.