Most defined benefit occupational pension schemes are subject to Section 75 of the Pensions Act 1995. This provides that when a pension scheme winds up, the scheme’s employers are liable to pay a debt to the scheme’s trustees equal to the funding deficit in the scheme. Since April 2005 this deficit has been assessed on the ‘buyout’ basis – the amount it would cost to secure all of the pension liabilities with an insurance company.
However, an employer debt also arises under Section 75 when an employer stops participating in a multi-employer scheme if the scheme is ongoing and has a funding deficit. In this situation, the trustees must ask the scheme actuary to calculate the total deficit in the scheme on the date of the employment-cessation event, again on the ‘buyout’ basis. The total deficit is then apportioned between all the participating employers according to each employer’s share of the total liabilities.
Section 75 can be a real impediment to corporates wishing to make disposals and internal reorganisations. Where these involve multi-employer defined benefit pension schemes, the liabilities involved can be significant. It is also a common complaint that it is too complicated.
In response, last year a number of different options were introduced for dealing with Section 75 debt. If the employer enters into one of four specified arrangements with the scheme trustees, then its share of the total deficit will be reduced in line with the terms of the arrange-ment. However, these new regulations do not address all the concerns.
Following industry lobbying, in September this year the Government published a consultation paper setting out proposals for further reform. These proposals are intended to introduce greater flexibility while also maintaining member protection.
It is proposed that two exceptions are introduced so that in certain circumstances debt will not occur on a corporate restructuring involving a multi-employer scheme. These new exceptions are called the ’general easement’, which will apply to one-to-one transactions where the assets of the exiting employer are transferred to a single receiving employer, and the ‘de minimis easement’, which will apply to smallscale restructurings.
The general easement
No debt will be triggered on a simple corporate restructuring where there is one exiting employer transferring all its assets and liabilities to one receiving employer. The restructuring must meet the following four key requirements:
The receiving employer must take over responsibility for all of the exiting employer’s employees and assets, and the defined benefit scheme liabilities attributable to the exiting employer. These transfers must take place on the same date.
The scheme trustees must assess whether the ‘restructuring test’ has been satisfied. Trustees must consider whether the receiving employer is as likely as the exiting employer to meet the scheme’s liabilities, and is likely to be able to meet its own liabilities as it was immediately before any reorganisation. The trustees must inform the exiting employer whether the restructuring test has been satisfied. If the test has been met, they must also notify the Pensions Regulator.
The exiting employer and the receiving employer must confirm to the trustees in writing that an insolvency has not occurred in relation to them, and that if the restructuring occurs an insolvency event would be unlikely to occur to them within 12 months.
The employers and trustees must ensure that the corporate restructuring is completed within 12 weeks of the trustees’ decision that the restructuring test has been satisfied.
The de minimis easement
The de minimis easement is intended to apply to small corporate restructurings where the restructuring test is inappropriate. For an employer to take advantage of the de minimis easement, the trustees and the employers must follow procedural steps that are similar to those for the general easement. In addition, the following conditions must be satisfied:
- the scheme must be funded in excess of the Pension Protection Fund basis;
- the number of scheme members attributable to the exiting employer must not be greater than 2 per cent of the scheme’s defined benefit membership;
- broadly, the value of the exiting employer’s PPF liabilities must not exceed £100,000; and in a rolling period of three years, no more than 5 per cent of defined benefit members can be affected by de minimis easements.
However, the new ‘easements’ will only apply where it is likely that the debt would previously have been apportioned under a scheme apportionment arrangement. The use of scheme apportionment arrangements on corporate reorganisations may continue because the new easements are so limited, both in terms of their application to only the simplest or smallest transactions and in terms of the prescriptive procedural process that is required.
Jay Doraisamy is a pensions partner and Ewan Nelson an associate at Eversheds