New employer debt easements introduced

25 May 2010

The Department for Work and Pensions (“DWP”) has responded to criticisms that the employer debt rules under section 75 of the Pensions Act 1995 (as amended) were inhibiting genuine corporate restructurings. The changes were introduced in the Occupational Pension Schemes Employer Debt and Miscellaneous Amendments Regulations 2010 (“new Regulations”) which came into force on 6 April 2010.

The new Regulations create two new easements which will mean that an employer debt is not triggered on a corporate restructuring which meets the “general easement” or the “de minimis easement” criteria. The exiting and receiving employers are obliged to pay the trustees' costs arising from the use of these easements.

The “steps” that must be followed in order to utilise the new easements are outlined below. These steps are prescriptive and require employers and trustees to follow the rules contained within them precisely in order to avoid triggering a section 75 debt. In the following paragraphs of this INSIGHT, we have provided an overview of the easements:

The “general easement”
The general easement comprises a seven-step procedure, the primary aim of which is to ensure that the trustees are satisfied that the transaction does not reduce the security of members’ benefits. The general easement applies to transactions where the assets of the exiting employer are transferred to a single receiving employer. A key element is the “restructuring test” which, in general terms, means that the trustees must satisfy themselves that the receiving employer is “at least as likely” as the exiting employer to meet the scheme liabilities it is acquiring from the departing employer, as well as its own. The trustees are to take into account the material changes in both the exiting and receiving employers financial, legal and other related matters.

The “de minimis easement”
A less rigorous five-step procedure applies to the de minimis easement. This easement is designed for use in small transactions involving only a handful of scheme members. The scheme members with the exiting employer must now be either no more than two members or no more than 3% of scheme membership, whichever is the greater. The aggregate annual amount of the accrued pensions of the members involved in the transaction must not exceed £20,000. Over a period of three years, transactions in a scheme must involve no more than five members (or 7.5% of scheme members: whichever is the larger) and the aggregate annual amount of accrued pensions in respect of these members must not exceed £50,000.

Comment
The new easement may not prove to be altogether helpful in practice. For instance, both easements remain prescriptively narrow and are applicable to two-party restructurings. An accidental failure to adhere to the prescriptive procedures within the easements could trigger an employment-cessation event. Although the changes may help some schemes, we suspect that the overall effect of the changes brought about by the easements will be minor.