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Flexible apportionment of employer pension scheme debt will be introduced from January

Delayed changes to the rules surrounding how companies repay pension debts will come into force on 27 January 2012, the Government has announced.16 Dec 2011

The new regime introduces a 'flexible apportionment arrangement' for dealing with employer debts arising on corporate reorgansations. The measure could save businesses £28 million a year, revised up from a previous estimate of £17m.

"This is because the recent losses in financial markets have increased scheme deficits hence the amounts of employer debts that would be payable," the Department for Work and Pensions (DWP) said in its consultation paper on the changes.

The new Employer Debt Regulations were expected to come into force on 1 October 2011, but were delayed to allow the DWP to carry out a consultation on the proposals. Employers had argued that its proposals for change "unnecessarily inhibit corporate activity, in particular... the ability of companies to restructure in order to be better able to deal with changes in the economic environment," the Department said.

An employer debt can arise when a company leaves a multi-employer defined benefit occupational pension scheme and is commonly encountered in corporate transactions or during internal restructuring. When an employer leaves a pension scheme it must ensure that there are enough funds in the scheme to pay for the benefits due to its employees. Where there is not enough money to run the scheme, the employer that leaves is still liable for its share of this underfunding.

Under the Pensions Act, repayment of this debt can 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 must carry out a 'funding test' to make sure that the remaining employers can fund the scheme.

The new regulations introduce 'flexible apportionment arrangements', which allow trustees of pension funds to choose to give some companies more time to pay their share of the debt. 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.

The regulations also extend the current 12-month 'period of grace' to 36 months. This is the period during which companies 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 new regulations give trustees discretion to extend this period to 36 months. In addition, employers will have two months rather than one month after they cease to employ active members of a scheme to notify trustees if they wish to rely on a period of grace.

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind, agreed that the Government's previous proposals were "too restrictive" to be of much practical use.

"There is little difference between flexible apportionment arrangements and the apportionment arrangements we are already familiar with. The extension of the deadline for the employer's 'period of grace' notice is a move in the right direction, but overall the changes are unlikely to have a huge impact in practice," he said.

Tyler said that most of the changes made to the draft regulations as a result of the consultation period were minor, including the introduction of specific provisions to allow a flexible apportionment arrangement to be used for an employer in a frozen scheme, which is a closed scheme to which no further contributions will be made and no further benefits accrue. The regulations also clarify that an arrangement cannot take effect until the employer leaving the scheme has ceased to employ active members, he said.

The Pensions Regulator would update its guidance on multi-employer schemes and employee departures in due course, he said.