Employer Debt – Seven steps to heaven?

Introduction

When a company exits an underfunded multi-employer DB scheme, its share of any deficit generally becomes a debt due to the trustees (the employer debt). In a consultation published in September 2009,1 the Government proposed easements to the employer debt legislation2 where a business is restructuring. The Government has now laid Amendment Regulations3 which will apply from 6 April 2010, together with its response to the consultation.

In this Alert:

• Key points
• One-to-One Transactions
• General Easement
• De Minimis Easement
• Technical Amendments – A Step too Far

Key points

• The Amendment Regulations introduce two new arrangements to facilitate one-to-one corporate restructurings between two employers participating in the same DB scheme – the general easement and the de minimis easement.
• Provided certain statutory steps are taken “without undue delay”, no employment cessation event will occur and therefore no employer debt will arise.
• Changes made during consultation include a requirement for the two employers involved to meet the costs of complying with the relevant statutory steps.
• In a welcome move, given the complexity of the provisions, if there is a “minor infraction” (or breach) of the statutory steps no employment-cessation event will occur, although this sanction remains for more serious breaches.

One-to-One Transactions

The easements only apply on “one-to-one” transactions between two employers in the same corporate group – the ‘exiting employer’ and the ‘receiving employer’ – where both participate in the same DB scheme.

Whilst this restriction was criticised during consultation, the Government has decided not to extend the easements to allow more complex restructurings for the time being, citing member protection. However, encouragingly, it intends to consider this issue further.

General Easement

Trustees and employers need to carry out seven statutory steps (down from eight in the original draft) to meet the requirements of the general easement.

The key step is the “Restructuring Test”. This requires the trustees to be satisfied that, following the restructuring, the receiving employer will be at least as likely as the exiting employer to meet all the exiting employer’s liabilities, as well as its own. As part of the test, the trustees will be required to consider the covenant of the two employers.

The receiving employer must then take over responsibility for the exiting employer’s assets, employees and pensions obligations under a legally enforceable agreement. This step must be carried out within 18 weeks4 of the trustees’ decision on the Restructuring Test.

If incorrect or incomplete information is provided to the trustees in relation to the Restructuring Test (other than, say, a minor omission), an employment cessation event will occur. However, employers will be pleased to hear that, to provide certainty, there is to be a cut-off date of 6 years following the date of restructuring after which no debt can arise.

De Minimis Easement

The de minimis easement will be of more limited application. It only applies to schemes which are fully funded on a PPF basis, involving transactions affecting relatively small numbers of scheme members.

The scheme members in respect of whom DB benefits have accrued as a result of pensionable service with the exiting employer must be:

• no more than two members; or
• no more than 3% of scheme membership (up from 2% in the original consultation);

whichever is greater.

In addition, the total annual amount of accrued pensions of the members must not exceed £20,000 (this sum will be increased by £500 each year).

There are also separate limits where a number of restructurings are carried out in a rolling three year period.

Technical Amendments – A Step too Far

Perhaps the biggest single change to the Amendment Regulations is the removal of various technical amendments to the employer debt legislation proposed in the original consultation. Following divergent views on consultation, the Government recognises that “additional work will be needed (in conjunction with stakeholders) to address all the issues raised”.

So, this is certainly not the end of the road for changes to the employer debt legislation.

1 For more details, please see our Alert dated 23 September 2009
2 The Occupational Pension Schemes (Employer Debt) Regulations 2005
3 The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2010
4 The Amendment Regulations allow an extension of up to 18 weeks, at the trustees’ discretion