The Department for Work and Pensions ("DWP") has issued an informal consultation looking again at the Employer Debt legislation. The consultation, which focuses on four proposals for comment, is to be circulated to a limited number of stakeholders. The proposals are only intended to apply to employers of multi-employer schemes on a group restructuring where the employer covenant was strong before the restructuring and remains so afterwards.

This consultation follows on from the earlier Deregulatory Review Report published in July 2007, which made two principal recommendations:

  • That employer debt should not be triggered for a "grace" period of up to one year where a company ceased to have employees actively participating in a scheme, but would acquire more employees within the year; and
  • Where there is a group corporate restructuring of employers in a multi-employer scheme, a debt should not be triggered where the original employer covenant was strong and the covenant remains as strong following the restructuring.

The first proposal was accepted by the Government and incorporated into the Employer Debt Regulations in April 2008. The second is now revisited in this consultation following increasing concern from employers about the triggering of an employer debt on an internal group restructuring. The DWP has outlined four proposals for comment:

  • Scheme apportionment as the default - Subject to a funding test being met, the debt triggered following a corporate reorganisation would be automatically apportioned to the acquiring employer. This would change the order in which the current apportionment arrangements operate.
  • A de minimus threshold - A debt would be triggered only upon reaching a set minimum threshold. The consultation suggests 30 per cent of total scheme liabilities.
  • Reducing the exiting employer's debt from full buy-out level - The debt would be calculated using the greater of the scheme specific funding basis and section 179 basis. This would only apply where the employer covenant remains unchanged and the expectation of sustaining the funding level is not materially changed.
  • Do nothing - The employer debt legislation would remain unchanged. The full buy-out debt would be triggered on an employer ceasing to participate with the option to deal with the debt by a scheme apportionment arrangement or a withdrawal arrangement.

It is surprising that this consultation follows so soon after the Government's response to the Deregulatory Review Report and the revisions to the Employer Debt Regulation (see our June 2008 Pensions Law review at http://www.blg.co.uk//pdf/PLR9.pdf) and there must be an argument for delaying to at least allow a reasonable period of time to assess properly the effect of the recent changes.

A formal consultation will follow should any firm proposals or draft legislation arise from the discussion paper.

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