Field blasts lack of support for plumbers faced with huge DB debts

Independent MP and committee chair Frank Field said family businesses might have been better able to cope with the liabilities they now face if the scheme had kept them better informed, in the latest of a series of correspondence with pensions and financial inclusion minister Guy Opperman.

The letter references steps taken by the plumbing industry’s multi-employer DB scheme to recover unpaid exit debts, in a move that has already forced one plumbing company to wind up. While the scheme has around £400m in orphan liabilities, it is fully funded on a low-risk basis. 

Employers participating in a multi-employer scheme become liable for what is known as a section 75 employer debt when they withdraw from the scheme or cease trading. Should this debt not be paid on time, the scheme’s remaining employers will become liable to this debt, which is known as an orphan liability.

It is very disappointing that many of these employers might have been in a better position, or at minimum better informed, if they had received better support from the scheme

Frank Field MP

The Plumbing and Mechanical Services (UK) Industry Pension Scheme will issue around 150 section 75 debt notices, its administrator confirmed. This debt is calculated on a basis reflecting the level of assets needed to buy out all member benefits in the bulk annuity insurance market.

Some regard this disparity as overly punitive – prior to 2005 the debts were based on the lower technical provisions standard. The government consulted on section 75 debt in 2017, and subsequent legislation allowed employers to delay debt payment, under a ‘deferred debt arrangement’.

The size of the orphan liabilities in the plumbing multi-employer scheme, and the potential impact on small businesses of recovering them, elicited a letter of concern from Mr Field to the pensions minister, published last month, stressing that “many of the employers involved are family-owned businesses with no limited liability protection and are therefore at risk of personal bankruptcy”.

But Pensions Expert can reveal that further correspondence shows Mr Field to be dissatisfied with the minister’s response.

Mr Opperman’s letter, dated April 12, said that after extensive meetings with employers and other interested parties, he had come to the decision that the existing regime offers employers enough flexibility. It argues that the closure of the plumbing scheme to future accrual, unlike winding up, will not trigger section 75 debts.

“For some employers this will have a similar effect as the section 75 debt crystallises,” Mr Field retorted in a letter dated April 30.

“Employers – who rely on trustees to manage the scheme effectively – do not appear to have been sent section 75 debt figures for many years. Nor were they alerted to the problems they would face,” he wrote.

“It is very disappointing that many of these employers might have been in a better position, or at minimum better informed, if they had received better support from the scheme.”

The letter, which was copied to the Pensions Regulator and trustees, continued: “Your letter rightly highlights that this is a difficult case, but much more needs to be done to ensure the employers in this scheme are properly supported and the trustees carry out their duties effectively.”

Tackling mountains of employer debts

The plumbing scheme had 35,403 members as of April 2018, according to an update sent to members. The scheme has had around 4,000 employers since it was set up in 1975.

The trustees of the plumbing scheme have not issued section 75 notices before, owing to the complexity of the data and the legislation, according to Kate Yates, chief executive of the scheme’s administrator Plumbing Pensions.

A data-cleaning exercise has been carried out in order to identify who owes the scheme.

“The way that the legislation requires orphan liabilities to be taken into account is complex and could be considered unfair,” Ms Yates says.

The scheme’s trustees have lobbied the government for years in search of a solution that protects members’ benefits and respects the legislation, she adds. They have also consulted with employers twice in the past few years, and have taken professional advice.

The scheme's actuary, Willis Towers Watson, is still calculating the notices in a process that will continue until the end of June. These will range in value from “tens of thousands of pounds up to many millions of pounds”, Ms Yates says.

Plumbers could be forced out of business

The notices are particularly punitive for plumbing businesses with a handful of members, and for one plumbing business this fee has proven to be too much.

A plumbing company will wind up after receiving a £395,200 bill from its pension scheme, according to Darren Cooke, a chartered financial planner at Red Circle Financial Planning.

Speaking to Pensions Expert sister title FT Adviser, Mr Cooke says that his client “had no choice” after receiving the debt notice, with the outstanding amount eclipsing the just-profitable business’s turnover many times over.

The plumbing scheme is broadly fully funded on a self-sufficiency basis, according to Ms Yates, meaning the scheme would be able to support itself by investing its assets on a low-risk basis and pay members’ benefits without outside support.

The scheme is also set to close to future accrual. This would not trigger an employer debt but would prevent the build-up of new liabilities.

At the scheme’s last actuarial valuation in 2017, the actuary told the trustees that “in all likelihood”, the scheme holds enough money to pay these benefits in full, Ms Yates says.

The employers have three options available to them, should they not be able to meet their obligations, including paying the debt in stages.

They will also have the option of applying for a deferred debt arrangement, or a flexible apportionment arrangement. Securing an FAA would allow a withdrawing employer to apportion a share of its liabilities to others in the scheme providing members are not worse off, sidestepping the full buyout cost. No formal employer debt calculation would be required.

In his letter to the select committee, Mr Opperman noted that FAAs have been successfully used to help family businesses restructure into a corporate entity, limiting their personal liability without triggering the employer debt.

But Ian Neale, a director at pensions intelligence service Aries Insight, which favours the technical provisions basis for calculating employer debt, highlights that it would be challenging to use an FAA to lessen the overall burden on an employer in the plumbing scheme.

“It wouldn’t be easy for a small employer to find another participating employer, or employers, who are willing to take on the debt,” he says.

“It’s more appropriate where you’ve got a group of companies… and one company in the group is ceasing to employ active members.”

Parliament makes its own moves in s75

Solutions to the matter of orphan liabilities are also being sought on the parliamentary backbenches. Last year, Scottish National Party MP Alan Brown submitted a private members’ bill that called for orphan liabilities to be based on technical provisions.

The bill, which has yet to achieve a second reading in parliament, also called for the Pension Protection Fund to take on orphan liabilities under certain circumstances. Ms Yates describes Mr Brown’s proposal as “quite a drastic solution”, and “perhaps goes one step beyond what is necessary”.

Given the scheme’s healthy funding level, placing liabilities in the PPF would force an unnecessary cutback in member benefits, Ms Yates says. PPF deferred members are only entitled to 90 per cent of their benefits and typically enjoy lower increases. Mr Brown could not be reached for comment.

Joe Dabrowski, head of DB, the Local Government Pension Scheme, and standards at the Pensions and Lifetime Savings Association, observes that the minute size of some of the schemes’ employers poses an unexpected challenge to section 75 legislation.

“What has probably never been envisaged is that the legislation would apply quite in the way that it does with what you might call… ‘mom-and-pop-type employers’,” he says, adding that these are not incorporated in the same way as more traditional pension scheme sponsors.

The social toll of this legislative quandary will reach beyond bankrupt employers, according to Fiona Hodgson, chief executive at the Scottish & Northern Ireland Plumbing Employers’ Federation, who argues that this crisis could have devastating consequences for plumbing businesses and the wider community.

“We are disappointed that government has failed to take action and make amendments to address the unintended consequences of the legislation and protect those personally affected,” she says.