Employer Debt Regulations - Part 1

Employer Debt Regulations - Part 1
The long-awaited Employer Debt Regulations 2008 [1] (the "2008 Regulations") were laid before Parliament on 14 March 2008 and come into force on 6 April 2008. These 2008 Regulations follow an extensive consultation exercise carried out by the Department of Work and Pensions (DWP) between August and October 2007. By way of reminder, an explanation of these 2008 Regulations (and the previous Employer Debt Regulations) is that they cover the situation when employers sever their links to a defined benefit scheme and set out how the debt should be met.

The DWP has cited two key motivating factors for these revised Regulations namely:-

• reports from the pensions industry that the Employer Debt Regulations 2005 created unnecessary difficulties for multi-employer schemes; and
  
• concerns raised by the Pensions Regulator that some employers were exploiting the 2005 legislation to avoid paying their share of the debt and were abandoning their schemes.
  

The DWP has explained that the 2008 Regulations are "designed to strike a balance between making the existing employer debt regulations more flexible in their operation and frustrating the abandonment of pension schemes by their sponsors". The final version of the Regulations differs from the draft regulations released as part of the consultation process (as referred to in our Pensions Extra, August 2007).

The purpose of this e-bulletin is to provide our high level comments on the 2008 Regulations but due to the complex nature of this topic we have decided to set out our comments over two e-bulletins, both of which will be issued during April 2008. This is Part 1 of our e-bulletin and Part 2 will be issued towards the end of this month. Specific advice should be taken before acting on the new 2008 Regulations.

The key changes introduced by the 2008 Regulations are:

• Amendments to the definition of the "employment cessation event"– this is the statutory trigger for calculating an employer exit debt;
• Following a cessation date, a 12 month period of grace for new members to join a multi-employer scheme before a debt is triggered;
• New arrangements for the apportionment of debt;
• New types of withdrawal agreement; and
• Transitional arrangements to allow transactions already agreed or in negotiation to continue to use the rules under the current regime for up to 12 months after the new regulations come into force.

"Employment Cessation Event" - The new definition means that the statutory trigger for an employer exit debt in relation to a multi-employer scheme occurs on the date when an employer has ceased to employ at least one person who is an active member of the scheme and at least one other employer (who is not a defined contribution employer) continues to employ at least one active member of the scheme. 

[1]  The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendment) Regulations 2008

There has been some discussion within the legal fraternity regarding the precise meaning of this revised definition due to slightly ambiguous drafting. Our view, however, is that the intention is that an employment cessation event is deemed to have occurred when an employer in the situation outlined in the definition ceases to employ any active members in the scheme at all. This means that if one employer within a multi-employer scheme ceases to provide pension benefits, the employer exit debt will be triggered. If, on the other hand, all employers within a scheme simultaneously cease future accrual, no exit debt will be triggered.

This particular change is significant as it does not go nearly as far as the draft regulations which would have meant that the full debt would have been payable in a multi-employer scheme when all employers ceased to provide future accrual at the same time. This aspect of the proposed reforms was particularly controversial.

12 Month Period of Grace - A 12 month period of grace will be introduced to allow for a situation where although an employer has ceased to employ active members of a scheme, it anticipates taking on another employee or employees within one year and in this situation a debt will not immediately be triggered. This does help to avoid the type of scenario where a debt is triggered because, for example, a scheme has only one member who resigns unexpectedly.

In order to take advantage of this period of grace, however, it is a requirement that the employer must give notice to the trustees or managers of the scheme within one month of this cessation date occurring. If the employer does not in fact employ at least one active member within the 12 month period of grace, the employer will be treated as though the period of grace had not applied and so the debt will be triggered dating back to the actual time of the employment cessation event.

Our comments on the Employer Debt Regulations will continue in Part 2 of this e-bulletin, to be issued later this month.

Andrew Holehouse
Louisa Knox
Edwin Mustard

04/04/2008