The Department for Work and Pensions (DWP) has been consulting on changes to the way the Employer Debt Regulations affect multi-employer schemes when an employer ceases to participate in the scheme. A ceasing employer becomes liable for a share of the buy-out deficit in the scheme (the section 75 debt). This has an obvious impact if a parent company sells a subsidiary, but can also be inadvertently triggered by an internal group restructuring.

The current regulations contain a mechanism whereby part of the deficit can be deferred if the Pensions Regulator agrees. However, the wording of the regulations severely restricts the circumstances in which the Regulator can give agreement.

The draft regulations suggest a number of alternative approaches:

  • Apportionment share
    An agreement between the employer and the trustees (which can be made before or after the employer has ceased to participate) under which the ceasing employer pays a proportion of the section 75 debt which would otherwise have arisen. This could be a nominal sum. The trustees would need to be satisfied that the remaining employers would be willing and able to continue to support the scheme. The debt is not truly being "apportioned" as there will be no obligation on the remaining employers to pay it immediately.
  • Cessation agreement
    The ceasing employer pays its share of the deficit but calculated on the scheme-specific funding basis, rather than on a higher buy-out basis. The rest is guaranteed for payment in the future by another party (which could be the purchaser of the ceasing employer). This again requires the trustees' agreement.
  • Withdrawal agreement
    This is similar to a cessation agreement, but the ceasing employer could pay a lesser sum immediately, with the remainder being guaranteed. However, the agreement of the Pensions Regulator is also required.

These methods would give more flexibility to employers. It had been hoped that the new regulations would be issued in January, but we now understand that it is likely they will come into force in April 2008. It also remains to be seen whether all of the alternatives will be kept in the final form of the regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.