De-risking, buy-outs and mergers

The growth of funding deficits in defined benefit occupational pension schemes, together with the ever growing legal and regulatory burden of operating such schemes, has inevitably led to an increased recognition of the financial risks posed to employers by the operation of and participation in such schemes. Unsurprisingly, many employers have reacted by seeking to reduce the risks posed by their defined benefit schemes and, where possible, to eliminate those risks. Historically, employers could eliminate the risks by terminating the scheme and winding it up, although such an approach could result in pensioners suffering reductions in their pension income on retirement and could also lead to employment law complications.

Before 11 June 2003, an employer who terminated and wound up an underfunded scheme would trigger a statutory debt under the Pensions Act 1995, s 75 (a “s 75 debt”) payable to the scheme. However, at that time, the relevant basis for determining whether a scheme was underfunded on wind-up, and therefore for determining the amount of any s 75 debt, was the minimum funding requirement (“MFR”). As the MFR basis underestimated the true cost of providing members’ benefits