Why Section 75 of the Pensions Act has everyone quaking in their boots

Everyone in the pensions world knows the full annuity-based buyout price for a final salary scheme fund is usually exorbitantly expensive. So Section 75 of the Pensions Act, which triggers the full buyout debt if the employer, even inadvertently, crosses one of a fairly large number of lines in the sand while carrying out a common or ‘garden’ group restructuring as a tidying exercise, is a very scary piece of legislation.

The only thing that makes Section 75 a touch less scary is the fact that the legislation makes the trustees responsible for deciding whether to push for a buyout or not, following a ‘termination event’ ­ Section 75’s polite name for the employer making a major error.

Trustees, most employers would feel, are a lot easier to negotiate with than the cold and complex logic of Section 75 itself.

Now, after a prolonged string of complaints from industry and from professional advisors, HM Treasury and the Department of Work and Pensions have completed a consultation exercise looking to push through some ‘easements’ to the Section’s draconian logic, mindful of the fact that we may see more corporate restructuring in 2010. Both the pensions industry and its professional advisers ­ the lawyers, accountants, actuaries and pensions administrators ­ argue that where a restructuring exercise leaves the employer’s covenant in respect of the final salary scheme no worse, and possibly better than before, it is wildly illogical to talk about triggering a Section 75 debt.

Loophole phobia
The DWP seems sympathetic to this point, but as the consultation paper it has issued shows, it is hamstrung by its fear of creating loopholes in the legislation that will allow employers to walk away from their pension debts unscathed. This fear makes the Section 75 consultation document read like a trainee lawyer’s nightmare exam paper. As a result, most advisers are less than thrilled with it.

Clive Fortes, a partner and head of corporate consulting at Hymans Robertson puts his view bluntly. “Is this a useful consultation exercise? No. It will be of extremely little value,” he says.

There are two easements suggested in the consultation, both designed to make life easier for companies carrying out restructuring exercises. First, company A entirely consumes company B, in which case it can take over company B’s pension liabilities if a number of commitments are satisfied. This means company B is then released from its liabilities ­ which tends to be because it no longer has any active members in its final salary scheme and all the deferred members and pensioners are now under the wing of company A, which has to be able to offer at least as strong a covenant as company B in the eyes of the scheme trustees.