Section 75 Wind Up Rules - DWP To Consider Options For Change

The Department for Work and Pensions has announced that it is to begin a four week informal consultation into the rules which compel companies to fully cover the liabilities of their defined benefit pension schemes where a scheme is wound up or an employer ceases to participate in a scheme.

Under section 75 of the Pensions Act 1995, if a defined benefit occupational pension scheme (a "scheme") is wound up, or if an employer ceases to participate in such a scheme, a debt on the employer equal to the whole or part of the scheme's deficit can be triggered.

The basis for calculation of the debt is the "buy-out basis", this involves calculating the cost of securing all pension benefits based, on purchasing appropriate annuity policies from an insurance company. This basis for calculation is particularly stringent, and can give rise to a funding deficiency in most schemes, with the effect that the debt due from the employer is likely to be substantial.