Sackers’ Response to DWP consultation on employer debt

Background

The DWP’s consultation and draft regulations seek to address defective drafting in The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2010, which, if adopted, will amend regulation 2 (Interpretation) of the Regulations with effect from October 2013.

April 2010 saw the introduction of two easements in the employer debt legislation to assist businesses that are restructuring (the “restructuring provisions” which introduced two new arrangements to facilitate one-to-one corporate restructurings between two employers participating in the same DB scheme – a general easement and a de minimis easement).  In July 2010, the Joint Committee on Statutory Instruments (JCSI) reported an error in the drafting of the amending regulations, namely in Regulation 4 (3) sub-paragraph (b)(ii) which introduced the definition of “receiving employer”.

While the DWP was of the view that the wording was “intended to be a succinct way of capturing the idea that although the employer is unchanged for practical purposes, it has a new legal status so is legally a different employer” (albeit “not felicitously phrased”), the JCSI disagreed (JCSI: Instruments reported at ameeting held on 21 july 2010), noting that paragraph (b)(ii) “does not fit grammatically with the opening words of the definition, and it cannot readily be determined […] what the wording of that paragraph should be” and should therefore be amended.

In this response:

• The proposed amendment

The proposed amendment

The consultation proposes amending the definition of “receiving employer” by removing the reference to “the new legal status of the exiting employer” (Regulation 1(3A)(b)(ii) of the Regulations).

While we are not aware of this provision being widely used (possibly because a change in legal status as referred to in the consultation – such as the incorporation of a previously incorporated charity – is uncommon), we do not support the removal of this provision.  In our view, removing this provision would limit the options available to employers, with potentially significant financial consequences.  We would, however, support amendments to the drafting of (b)(ii) in line with the original policy intention (see Consultation questions 1(a), (b) and (c)).

We agree that the provisions in the Regulations which permit the use of flexible apportionment arrangements (FAA), as set out in regulation 6E of the Regulations, may be wide enough to cover the circumstances originally envisaged to come within (b)(ii), so as to allow an FAA to be used on the change of legal status of an employer that gives rise to an employment cessation event, (see Consultation question 1(e)).  However, whether regulation 6E can be used instead will depend on how the change in legal status takes effect, (see Consultation question 1(f)).  For example, is it intended that the “leaving employer” and “replacement employer” can both be parties to a legally enforceable agreement so that they can give their consent to the FAA?  In addition, the restrictions which apply on the use of an FAA (principally the funding test and the requirement for consent) may mean that the preferred route is to use the restructuring easement.