The Department for Work and Pensions has issued a consultation designed to allow certain internal group restructurings without triggering the potentially expensive employer debt provisions under pensions legislation.

Background

Under section 75 of the Pensions Act 1995, where an employer ceases to participate in a multi-employer defined benefit pension scheme the default position is that the trustees can ask the employer to pay its share of the scheme's buy-out deficit.

Last year, the employer debt regime was overhauled to set out alternatives to this default position in the shape of scheme apportionment arrangements, regulated apportionment arrangements, cessation agreements and withdrawal arrangements. At the time, the Government said that it would consider the scope for further relaxation of the requirements in relation to intra-group reorganisations. DWP have now issued their formal consultation.

How to avoid triggering a debt

The new proposals suggest that so long as one of two new easements is satisfied, corporate restructurings between two employers (the exiting and receiving employer) within the same multi-employer scheme will not trigger a section 75 debt at all. Nor will this prejudice any future entry of the scheme to the Pension Protection Fund.

The easements will be available for restructurings involving associated employers within a corporate group, as well as where one participating employer in a multi-employer scheme changes its legal status (for example, an unincorporated charity becoming a company). As an anti-avoidance measure, the receiving employer must have its head office in the United Kingdom.

The first easement: the restructuring test

No debt will be triggered where:

  • the receiving employer assumes responsibility for all assets and employees of the exiting employer, together with pension liabilities attributable to it;
  • the trustees determine that a "restructuring test" is met: "whether, after the corporate restructuring has taken place, the receiving employer will be 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 receiving employer is not insolvent nor likely to be so within 12 months;
  • the exiting employer is not insolvent, nor would insolvency have been likely within 12 months if the restructuring did not happen; and
  • a number of procedural steps, including giving written notices, are followed by the parties without any "undue delay". These steps include notifying the Pensions Regulator where the restructuring test is satisfied.

The Government suggests that the Regulator may issue guidance on the restructuring test.

The second easement: the de minimis test

No debt will be triggered where:

  • scheme funding is above the PPF funding level;
  • defined benefit members of the exiting employer represent no more than 2% of all such members;
  • the PPF liabilities of the exiting employer do not exceed £100,000; and
  • no more than 5% of members transfer under this easement in any rolling three-year period.

In addition, as with the first easement:

  • the receiving employer must assume responsibility for the exiting employer's assets, employees and pension liabilities;
  • the same test for insolvency or potential insolvency of each employer will need to be satisfied; and
  • prescribed procedural steps must be followed.

What happens now ?

With the recent downturn in economic activity prompting many internal restructurings, those involved with multi-employer pension schemes will welcome these relaxations. However, even under the current legislation apportionments of exit debts to nominal sums and Regulator clearance should be available in the circumstances described in these proposed easements.

No change in the law is likely until April 2010. This is, however, an opportunity to feed comments back to DWP: in the past, proposed changes to employer debt legislation have often been substantially revised. The full consultation document can be found here. The consultation period closes on 19 November 2009.

In the meantime, employers, trustees and their advisers should factor these proposals into any discussions concerning group restructuring.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 24/09/2009.