With effect from 15 March 2004, The Occupational Pension Schemes (Winding Up and Deficiency on Winding Up etc) (Amendment) Regulations 2004 (SI 2004/403) oblige solvent employers who choose to wind up their pension scheme to fund the full buy-out cost of members’ accrued rights* - with retrospective effect to 11 June 2003.
* where the date on which the assets and liabilities are calculated is on or after 15 March 2004.

Some commentators on the consultation draft of those Regs expressed concern that the definition of insolvency used could be exploited by employers to avoid this higher debt. In particular, while companies in administration or receivership are regarded as solvent, companies in Members’ Voluntary Liquidation (MVL) are regarded as insolvent.

After consulting the CBI and the IoD, the DWP is now seeking views from the pensions industry on further amendments to the Winding Up Regs, the Deficiency on Winding Up Regs and also the Transfer Values Regs. The amending Regs essentially seek to remove the present distinction between the debt on a solvent and on an insolvent employer. They would extend the full buy-out liability to situations where the sponsoring employer of a salary-related occupational pension scheme (including a participating employer in a multi-employer scheme) becomes insolvent. A particular objective is to deter directors from using MVL to liquidate a company in a healthy financial position and thus avoid the higher debt requirement.

The Government’s general aim is to enable scheme members to receive more of their accrued pension entitlement than they are presently able to. However, the consultation draft recognises that in other types of liquidation (ie compulsory liquidations and creditors’ voluntary liquidations (which together accounted for 85% of corporate insolvencies in England, Wales and Scotland in 2002), the new rules won’t make much difference. This is because the pension scheme still ranks as an unsecured creditor. Usually only a few pence in the pound, at most, is available for unsecured creditors in these situations. Although the extra liability of the pension fund under full buy-out might be significantly greater, the additional amount of money available would be still very modest in relation to the total liabilities.

One disappointing aspect is that the DWP has chosen here to use the present convoluted legislation on insolvency, rather than taking advantage of the Pensions Bill to achieve a shorter route to the same goal. In its response to comments on the previous amending Regs, the DWP stated: "Chapter 2 of Part 2 of the Pensions Bill changes the definition of insolvency for employers that will be used in future" (para 6.3.3). Indeed, Clause 115 of the Bill as it currently stands (consideration by the House of Lords Grand Committee is due to resume this afternoon) comprehensively defines an "insolvency event". However, it appears at the moment that section 75 (4) of the Pensions Act 1995 (Deficiencies in the assets), which defines a "relevant insolvency event" by reference to the Insolvency Act 1986 (as amended by the Enterprise Act 2002), is to be left unchanged.

The reason may lie in the political imperative for the Government to be seen to be doing all it can, pending introduction of the Pension Protection Fund (PPF), to reduce the impact on members of grossly underfunded schemes winding up. The Government also is obviously determined to minimise the potential financial demand a scheme may make upon the PPF. A further consideration is that presently, the debt calculation depends upon the MFR, which the Pensions Bill is to replace - but perhaps not until April 2006 [see previous article].

The draft Regs also seek to amend the Transfer Values Regs so that where a defined benefit scheme has begun to wind up, and where at the time the information is being provided the employer is not insolvent (defined with reference to the Insolvency Act as above), on being asked for a statement of entitlement to a guaranteed cash equivalent trustees must advise the member to seek independent financial advice before deciding to transfer out.