Employer debt changes "increase regulatory burden"
UK - Amendments designed to make the UK's existing Employer Debt Regulations "more flexible" could significantly increase the regulatory burden on defined benefit schemes, consultants have warned.
The Employer Debt legislation, which came into effect on April 6 2005, specifies how employers should meet its share of any funding shortfall - measured on an annuity buyout basis - when it severs links with a defined benefit pension scheme.
The aim is to stop employers from avoiding their pension responsibilities when withdrawing from a single DB or multi-employer scheme.
However, if it wants to sell a subsidiary company or to complete an internal restructure, this could trigger an employer debt that could hinder operations, as law firm Nabarro claims the cost of securing benefits on an annuity buyout basis "usually far exceeds the cost of funding these benefits on an ongoing basis".
As a result, the government has issued amendments to the existing regulations, scheduled to come into force on April 6 2008, which are designed to "strike a balance" between making the regulations more flexible and stopping employers from avoiding their pension liabilities.
Changes to the existing rules include:
But Mike O'Brien, minister for pension reform, said: "The work on employer debt does not stop here. Following on from the deregulatory review, we will work over the coming months with the pensions industry to see if it is possible to seek a practical solution to the problem of company re-organisations triggering the employer debt provisions, without undermining the principle that employers should fully meet their pension obligations."
However, Mercer expressed some concerns about the changes, as it suggested the tactics are "increasingly at odds with the requirements of an overburdened pensions industry looking for a 'deregulatory' approach".
Deborah Cooper, principal in Mercer's retirement business, pointed out the changes will mean employers and trustees, who have already agreed a particular approach to apportioning any pension scheme debt between employers in a multi-employer scheme, "will have to revisit their agreement".
She said: "The amendments clarify the circumstances in which employers withdrawing from ongoing occupational pension schemes will have to meet their share of the debt. However, to achieve this, the DWP has imposed additional layers of complexity on an already complicated regime.
"Having regulated this area of scheme operations almost to death, the DWP says it intends to go through the process all over again to achieve deregulation. This is merry-go-round management - it will impose large costs on an already over-burdened pensions industry," added Cooper.
Actuarial consultants, Lane Clark & Peacock (LCP), admitted some positive amendments include changing to the "flawed definition" an employer cessation event, which could have prevented employers from closing schemes to future accruals; the provision for "proportionate involvement" from the regulatory community and "clearly demarcated roles" for the actuary and trustees in determining the debt.
But David Everett, partner and head of pensions research at LCP, warned: "Those wanting simplification are surely to be disappointed. It seems that through the new definition of a 'employer cessation event' the government has preferred to travel down a road that results in a buyout debt being triggered in more situations than is absolutely necessary.
"Although the regulations do offer the prospect of some computational cost savings, this could be offset by the additional advice necessary to steer trustees and employers through the far more complex regime that will now start this April," he added.
Ian Greenstreet, pension lawyer at Nabarro, also admitted the changes "will address many of the technical problems with the existing employer debt regime", which have been "distorting normal corporate activity", as many disposals have been put on hold over concerns about the cash flow implications of triggering these debts.
Have Your Say:
Jane Marshall, partner at Macfarlanes, says:
"It is not simply that the regulations will increase the overall complexity,although they certainly do that. The main problem is that they include a fundamental shift in the balance of power away from employers and trustees working together, towards trustees acting alone.
"This change was not consulted on, and it completely undermines the structure of the regulations. There is little point in negotiating complicated withdrawal arrangements or carefully providing for the allocation of liabilities between employers if trustees have the power to apportion debts between employers on their own."
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