Changes to pensions debt offer small step forward

Mercer, pensions, trustees, Employer Debt Regulations


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Contact: Alistair Peck
Tel: +44 20 7178 3143

Changes to pensions debt offer small step forward

UK
London, 18 September 2009

The government’s attempt to create a greater balance between legitimate corporate restructurings and protection of employees’ pensions is to be welcomed, says Mercer, but the effect of its proposals will be too limited to have a radical impact.

The proposals, set out in its September 2009 consultation on Amendments to the Employer Debt Regulations, will help in only a limited set of circumstances, such as when employers change their legal status or undertake a simple corporate restructuring. Currently, certain types of corporate restructuring trigger a debt to the pension scheme on any employer ceasing to have employees accruing benefits in the scheme. However, pension scheme trustees can negotiate with all the affected employers to determine terms for apportioning the debt between them, if the trustees are satisfied that certain prudential tests are met.

The government’s proposals limit the role of pension scheme trustees, by avoiding the debt trigger following certain corporate activity. Instead, provided the trustees are satisfied the employer covenant for the scheme has not been diluted, the affected employers must agree to apportion the scheme liabilities between them, but they need not involve the trustees in any negotiation. Because the trustees’ role is restricted, to ensure that member security is not undermined the government has had to prescribe the precise circumstances in which the apportionment can take place and limit the flexibility of any arrangement. For example, a company selling a subsidiary to a purchaser external to the group is unlikely to be able to take advantage of the proposed easement.

Dr Deborah Cooper, head of Mercer’s retirement resource group, commented:
“Clearly, something must be done to reduce the stultifying effect that pension schemes can have on company progress and profitability. However, the government has spent a year developing proposals that are quite restrictive and that will not help in many cases.

“The real problem is the rigidity in the definition of accrued benefits and the high level of security that the UK attaches to these. To make real progress, the government needs to get a bit more radical in its approach.”