The Department for Work and Pensions has announced that it is to begin a four week informal consultation into the rules which compel companies to fully cover the liabilities of their defined benefit pension schemes where a scheme is wound up or an employer ceases to participate in a scheme.
Under section 75 of the Pensions Act 1995, if a defined benefit occupational pension scheme (a "scheme") is wound up, or if an employer ceases to participate in such a scheme, a debt on the employer equal to the whole or part of the scheme's deficit can be triggered.
The basis for calculation of the debt is the "buy-out basis", this involves calculating the cost of securing all pension benefits based, on purchasing appropriate annuity policies from an insurance company. This basis for calculation is particularly stringent, and can give rise to a funding deficiency in most schemes, with the effect that the debt due from the employer is likely to be substantial.
The basis for the current calculation of the "section 75 debt" was introduced in 2005, with the aim of preventing employers avoiding pension liabilities by leaving the scheme while remaining solvent.
In the current financial climate, companies may need to merge or restructure to survive, but the requirement to fund a deficit in the company's pension scheme is hampering takeover activity. Coupled with this is the fact that the fall in the stock markets, has meant that defined benefit pension fund deficits have increased substantially. The increase in fund deficits means there is also an increase in the section 75 debt potentially due by an employer.
The aim of the consultation is to achieve a position which will balance the need for pension security for individual members against the needs of employers in the current economic climate. Rosie Winterton, the Pensions Reform Minister, has recognised that there is a need for reform but has provided an assurance that any changes will not weaken any protection for pensions: "Where Government can help ease the burden on employers who run pensions, we should, but not at the expense of protecting people's pensions".
The consultation will consider possible options whereby, a debt on a company will not be triggered where the company remains committed to the pension scheme.
It has been noted, however, that the consultation is informal at this stage and that, this being a complicated area, it may be difficult to find a way to address the issues without inadvertently creating loopholes. A full public consultation is being considered for early next year with a view to introducing any changes in the second half of the year.
We will provide a review of the informal consultation, once it has been made available.
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