Section 75 of the Pensions Act 1995 has the potential to mean that, as a result of corporate restructuring (including on employee and TUPE transfers), an employer that participates in a defined benefit occupational pension scheme could have to make a one-off payment (a debt) to the scheme. The debt reflects the difference between the scheme funds that are available and the estimated cost of securing all scheme benefits in the form of annuity policies.
This has long been viewed as unduly onerous in the context of restructurings in which the intention is not to put in place contrived circumstances that are intended to avoid the obligation to fund scheme benefits.
Although in recent years, the Department for Work and Pensions (DWP) has introduced revised, more constructive legislation in this area, many still consider the employer debt legislation to be unnecessarily complex and a barrier to corporate restructuring.
The DWP is expected to consult soon on whether to allow 'group guarantees' to be put in place, as an alternative to requiring that a s75 debt is assessed and paid (if a debt is found to exist).
The changes could be in force as early as October and may allow employers in a multi-employer scheme to have another scheme employer guarantee that it will meet the liabilities of a departing employer. In that event, a s75 debt would not be triggered. Employers would still, however, have to satisfy a 'funding test' before being able to put a group guarantee in place.
The idea of a group guarantee has been welcomed by industry leaders.
Finally, it is believed that the consultation paper will also invite views on whether to extend the 'grace period' in which an employer could avoid triggering a s75 debt (where it has ceased to employ active members) by enrolling at least one new member. The current period is 12 months: it is anticipated that this will be doubled or even trebled.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.