Pension debt management rules to be postponed until December, DWP says

The Employer Debt Regulations were expected to come into force on 1 October. The DWP has said it will save businesses £27 million a year when they are introduced.

The regulations will allow trustees of pension funds to choose to give some companies more time to pay their share of shortfalls in defined benefit pension funds.

When employers leave a multiple-employer defined benefit pension scheme they should ensure that there are enough funds in the scheme to pay for the benefits of its employees. Where there is not enough money to run the scheme employers that leave the scheme are still liable for their share of the underfunding, and this is called the employer's debt.

A defined benefit or final salary scheme promises a set level of pension once you reach retirement age no matter what happens to the stock market and the value of investments. The benefit is usually calculated as a proportion of your final salary for each year of service.

Currently there are rules set out under the Pensions Act that allow the payment of the debt to be put off in some circumstances. Companies can ask the trustees to agree to an arrangement, known as an apportionment arrangement, which allows the employer who is leaving to pay less than the full amount of its debt. Some or all of the other remaining employers must agree to pay the rest. The trustees of the pension scheme need to make sure that the remaining employers can fund the pension scheme. This check is known as the funding test.

Under the proposed Employer Debt Regulations new "flexible apportionment arrangements" have been set out. Under these arrangements, trustees may decide to carry out the funding test only once where a number of employers leave the scheme at broadly the same time.

Currently employers have a 12-month period of grace when they do not have to pay debt on any underfunding when they do not employ any active pension scheme members, but intend to employ some in the future. The proposed new regulations give trustees discretion to extend the period of grace to 36 months. In addition, employers will have two months rather than one month after it ceases to employ active members of a scheme to notify trustees if they wish to rely on a period of grace.

The draft Employer Debt Regulations were consulted on in June after the DWP said some had argued that its proposals "continue to unnecessarily inhibit corporate activity, in particular to hinder the ability of companies to restructure in order to be better able to deal with changes in the economic environment".

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the delay in implementing the new regulations was probably down to the DWP considering responses to its consultation.

"The DWP has announced this delay as part of a 'one-in, one out' strategy for reducing regulation," Tyler said. "If new regulations create net costs to business, a deregulatory measures needs to offset that cost.  However, that does not explain the delay of this deregulatory measure.  That delay is probably attributable to the time taken to consider properly responses to the consultation."