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Overview

Following consultation, the Department for Work and Pensions (“DWP”) has issued final amending regulations relating to the employer debt requirements of Section 75 of the Pensions Act 1995 (“Section 75”). The regulations will come into force on 6 April 2010.

Under the existing debt regime, a corporate restructuring can trigger an “employment-cessation event” when an employer loses its last final salary active member, and there is at least one other employer who still employs active members. An “employment-cessation event” usually triggers an employer debt under Section 75.

The regulations are intended to address concerns that the existing debt regime hampers corporate restructuring by permitting certain concessions which will mean that no employer debt arises in specific transactions which meet set criteria. These are referred to as the “general easement” and the “de minimis easement”. Both easements will only apply to one-to-one company restructurings where there is a transaction between an exiting employer and a receiving employer where the two employers are part of the same multi-employer scheme and are (usually) associated.

Despite comments raised during the consultation, the DWP is of the view that permitting restructurings across multiple employers within a group could compromise member security, but intends to explore this further. It should, however, be noted that the existing mechanisms for apportioning debts in multi-employer schemes on the withdrawal of a participating employer such as a scheme apportionment arrangement and a withdawal arrangement are still available.

A large number of the technical amendments to the existing regulations which were proposed in the consultation have been removed, as the DWP considers that further work is needed to address all the issues.

General Easement

In order to ensure that a debt is not triggered under the general easement, the following 7 steps must be carried out:

1. The exiting employer must write to the trustees asking them to decide whether the “Restructuring Test” has been satisfied.

2. The exiting and the receiving employers must provide the trustees with any information they need to carry out the “Restructuring Test”.

3. The trustees must consult the exiting and receiving employers about the “Restructuring Test”.

4. The “Restructuring Test”: this requires the trustees to consider whether, after the transaction has taken place, the receiving employer will be “at least as likely” as the exiting employer to meet the scheme liabilities it is acquiring from the exiting employer as well as its own liabilities. As part of this process, the trustees must consider the covenant of the receiving and exiting employers to assess whether there has been any material change which would justify a change to the scheme’s technical provisions.

5. The trustees must inform the exiting and receiving employers of their decision as to whether the “Restructuring Test” has been satisfied and their reasons.

6. Under a legally enforceable agreement, the receiving employer must take over responsibility for all of the exiting employer’s assets, employees and scheme members, and all of the final salary scheme liabilities attributable to the exiting employer. This must be carried out within 18 weeks of the date of the decision in step 5, although this can be extended by a further 18 weeks at the trustees’ discretion.

7. The receiving and exiting employers must send the trustees written confirmation that step 6 has been completed, and the date of completion.

If, within 6 years of the transaction, it becomes apparent that either of the exiting or receiving employers provided incorrect or incomplete information to the trustees which would have resulted in their making a different decision in respect of the “Restructuring Test”, then an employment-cessation event occurs and a debt is triggered. This is a new provision, which was not included in the consultation draft.

De Minimis Easement

The de minimis easement is intended to apply to small corporate transactions where the “Restructuring Test” would be inappropriate because of the potential additional costs. Following the consultation, changes have been introduced to expand the potential use of this easement.

In order to ensure that a debt is not triggered under the de minimis easement, the following 5 steps must be carried out:

1. The exiting employer must write to the trustees asking them to make a decision about the conditions in step 2.

2. The trustees must satisfy themselves that the following conditions are met:

- the scheme assets must be at least equal to the PPF protected liabilities;

- the scheme members in respect of whom final salary benefits accrued from service with the exiting employer must be either no more than 2 in number, or no more than 3% of the total number of such members (whichever is the greater);

- the total annual amount of the accrued pensions of the members concerned must not exceed £20,000 (increasing by £500 each year);

- in a rolling period of 3 years, de minimis transactions must involve no more than 5 members, or 7.5% of the total number of final salary members (whichever is the greater), and the total annual amount of the accrued pensions of the members concerned must not exceed £50,000.

3. The trustees must send their decision about the required conditions to the exiting and receiving employers in writing.

4. and 5 – These are the same as steps 6 and 7 for the general easement.

General Changes for both Easements

The final regulations introduce the following main changes for both easements:

(a) Incomplete asset transfer or failure to confirm asset transfer: if it becomes apparent within 6 years of the transaction that not all the assets, employees and liabilities have been transferred, or if the receiving and exiting employers fail to confirm to the trustees that the full transfer has completed within 6 years, an employment-cessation event occurs.

The 6 year limit has been introduced to prevent the easements from potentially hampering other corporate transactions.

(b) Minor infringements: no employment-cessation event occurs if there is a minor failure to carry out any of the required steps correctly.

(c) Costs: the trustees may decide that any costs incurred will be met by either or both of the exiting and receiving employers. The deadline for making such a decision is one month after the relevant final step.

This has been introduced to prevent the costs being met from the scheme, and possibly by all the employers, including those unconnected with the transaction.

(d) Insolvency: the original requirement for the exiting and receiving employers to confirm to the trustees that an insolvency event has not occurred, and would be unlikely to occur within 12 months, has been removed.

The reason for this is to provide for less prescription and easier operation in practice.

Comment

The intention to reduce the circumstances in which a corporate transaction triggers unnecessary employer debt payments is to be welcomed. However, the easements may have limited impact as they only apply to fairly straightforward or small transactions and require compliance with strict procedural steps.

Although some conditions have been removed following the consultation, the new easements are still very regimented and do not allow for much flexibility.

It is to be hoped that the DWP will provide further consultation on expanding the easements to multiple transactions in the near future.

For more information please contact David Hosford or Rosamund Lee, or any member of Pitmans’ Pensions Department.

Pitmans, the leading Thames Valley law firm with offices in London and Reading has strengthened its Dispute Resolution and Pensions teams with three new directorships announced.

Jonathan Durrant and William Richmond-Coggan joined Pitmans in 2005 and 2007 respectively, and have been promoted to Director within the Dispute Resolution team.  Richmond-Coggan is also a Solicitor Advocate.  Chris Netiatis joined Pitmans in 2006 and has been promoted to Director within the Pensions team.  Netiatis also heads up the firm’s Criminal Law service.

Managing Partner, Christopher Avery commented:
“Pitmans is a firm that refuses to stand still.  These promotions underline our commitment to our staff, our desire to recognise everyone’s contribution and reward it accordingly.

It is our intention to continue to build the firm through a combination of promotion from within and outside recruitment, to ensure that the firm has a good blend of knowledge, experience and business acumen to meet the demands of the modern commercial world.”

Cross-border transactions can sometimes raise highly technical issues, as a result of the interaction of conflicting legal requirements between countries in relation to the same subject matter. But even where new legal, tax our accounting ground is not being broken, they remain challenging. Why is this, and what needs to be done to deal with the challenges?

The difficulties are due to the variations in national rules, regulations and practices, which require expert advice in each jurisdiction even if they do not conflict. As a result careful planning and management to identify and deal with these complexities within the overall transaction is essential. Such transactions will require a broad team of advisers in order to be effectively implemented, and particular consideration will need to be given to the structure of the team from the starting point of the transaction. Either the client, or one of the adviser team, needs clearly to be identified as leading and coordinating the adviser team overall. Read the rest of this entry »

(High Court – 7 December 2009)

Overview

In this case, the Court was asked to consider whether trustees have a duty to make rule amendments to make improvements to benefits to take account of post-A-Day changes.

The case concerned the payment of a lump sum death-in-service benefit which was restricted by the Earnings Cap (“the Cap”), where the deceased employee’s salary was substantially more than the Cap at the date of death. Post-A-Day, the Cap could have been removed which would have resulted in a far higher lump sum payment, but the scheme rules had not been amended and were therefore still governed by the transitional tax regime which maintains the pre-A-Day Revenue Limits, including the Cap, until 5 April 2011 (or any earlier date of amendment).

The deceased’s beneficiary claimed that she was entitled to the higher, uncapped lump sum.

Facts

The deceased was a senior employee of Open Text (UK) Limited (“Open Text”) and was killed in a car crash on 30 July 2007. Ms Power was the relevant beneficiary entitled to the lump sum death-in-service benefit which was payable on the deceased’s death under the terms of a Group Life Assurance Scheme (“the Scheme”) written under trust with Open Text acting as both the Employer and the Trustee.

The Scheme was an “exempt approved scheme” under the pre-A-Day tax regime governed by the Income and Corporation Taxes Act 1988 (“ICTA”), and it was a condition of its approval that any lump sum payable on death-in-service should not exceed four times an employee’s final remuneration. In determining this figure, any excess over the Cap was to be disregarded.

The lump sum payable was determined to be £451,200, but if the deceased’s additional earnings over the Cap were taken into account this would have been £750,000.

The Scheme was governed by Rules dated 29 March 2006 which provided that the amendment power lay with the Trustee with the consent of the Employer. At the time of the deceased’s death, the Rules were still governed by the transitional tax regime implemented by Schedule 36 of the Finance Act 2004 and the accompanying Modification Regulations. This meant that the Rules continued to apply as if ICTA and the Cap remained in force unless they were amended before the transitional regime ended on 5 April 2011. (The Court noted that there was no dispute between the parties about the effect of these statutory provisions.)

Ms Power claimed that the Rules should have been amended to terminate the transitional regime which would have resulted in the payment of the higher lump sum. She submitted that the Trustee owed a duty to the members to consider regularly whether the Rules ought to be amended, and if members would benefit as a result, to notify the Employer and invite it to consent to an amendment.

Judgment

The Court held the following:

• It was for the Employer and not the Trustee to determine the level of cover provided by the Scheme. In making this determination, the Employer owed an implied duty of good faith to the members, but no higher duty and no duty at all to potential beneficiaries.

• On 29 March 2006, the Employer and the Trustee had agreed the terms of the trust. The Trustee was under no immediate obligation to consider whether the terms should be changed as both parties had decided that the agreed terms were appropriate.

• As there was no duty on the Trustee to consider the level of cover or whether it should be changed, the Trustee did not need to put itself into a position where it was able to form a view as to whether the level of cover should be changed. The duties on trustees to inform themselves before making a decision cannot include a duty to inform themselves about matters outside their concern, in this case, the level of cover.

• Although the Employer had commenced a benefit review after A-Day, this had not been completed at the date of the deceased’s death. With hindsight, it was easy to see that it would have been simple to arrange for the Scheme to be changed and for the Cap to be removed for those beneficiaries who would have benefitted. However, the Employer had not acted unreasonably or in breach of duty in doing what it did.

Comment

This is a pragmatic and sensible decision, which makes it clear that it is for the Employer to decide the level of scheme benefits.

Schemes which have taken no action to implement rule changes to take account of the new post-A-Day regime should commence a review of the benefit structure as soon as possible. Once the transitional tax regime has ended on 5 April 2011, the new post-A-Day regime will automatically apply unless rule amendments have been put in place beforehand. In particular, this will mean that in the absence of a rule amendment, the Cap and pre-A-Day revenue limits will fall away, which could result in schemes having to pay far higher benefits with consequential funding and cost implications.

Overview

Following consultation, the Department for Work and Pensions (“DWP”) has issued final amending regulations relating to the employer debt requirements of Section 75 of the Pensions Act 1995 (“Section 75”).  The regulations will come into force on 6 April 2010.

Under the existing debt regime, a corporate restructuring can trigger an “employment-cessation event” when an employer loses its last final salary active member, and there is at least one other employer who still employs active members.  An “employment-cessation event” usually triggers an employer debt under Section 75. Read the rest of this entry »

The financial outlook for retailers in the past 18 months has been fairly grim and the situation appears likely to continue for the short term.

In addition to the recession, the amount of shopping carried out over the internet is on the increase which has had an effect on traditional retail.

In the UK the total online spend during 2005 was £8 billion which rose to £26 billion in 2009 – an increase of over 300%.

Over the past 10 years UK retail has added 58 million square feet of retail space (net) whereas online retail (at average industry sales per foot) has added the equivalent of an additional 56 million square feet.

Retailers are clearly looking to take advantage of this trend for convenient online shopping by providing customers with this option.

Given that there is no need for front line staff to deal with internet custom the staff costs related to these types of sales are significantly reduced. However existing staff can be re-trained to work in this new environment. Read the rest of this entry »

Overview

In January 2009, the Pensions Regulator published voluntary “good practice” guidance on record-keeping and measuring the presence of important member data items which are critical in the administration of a pension scheme.  Take-up of this guidance was limited, and consequently the Regulator now intends to introduce a far stricter approach to record-keeping.

The Regulator has therefore issued a further consultation document which sets out higher standards of record-keeping and proposes a stronger regulatory approach which will enable the Regulator to take enforcement action where evidence exists of poor practices.  The pension reforms due to be introduced from 2012 onwards will result in an increase in data volumes, and the Regulator considers that there is a window of opportunity before 2012 in which to raise standards of record-keeping.

To accompany the consultation, the Regulator has published a “bite-sized” e-learning module which gives a flavour of the key impact of the effects of missing or inaccurate data and helps the user think about the importance of maintaining accurate data in their scheme.

The consultation period on the new proposals ends on 27 April 2010.

Progress since the 2009 Guidance

Although the 2009 Guidance was generally well received and welcomed, the Regulator has concluded that there is no evidence of marked improvement in administration practices.  Awareness of the importance of record-keeping in some areas has been raised, but behavior is only changing to a fairly limited extent.

Consequently, the Regulator is of the view that more work is required to improve record-keeping standards. Read the rest of this entry »