Ombudsman rejects ex-plumber appeal to dismiss section 75 debt

The case involved a Mr E, formerly the owner of a small, unincorporated plumbing business, which was admitted to the scheme as a participating employer in 1979.

Mr E sold the business and retired in October 2011, ceasing to participate in the scheme. 

The real problem here is that the trustees have not been willing to apply Condition I to Mr E, and also that the government has not been willing to change the legislation on Section 75 as it relates to unincorporated employers in multi-employer schemes

Ros Altman, Conservative peer

However, under the rules set out in the Pensions Act 1995, individual directors of unincorporated businesses are personally liable to comply with scheme rules and statutory obligations. 

Under Section 75, employers in multi-employer schemes become liable for an employer debt when they leave the scheme or cease trading. Should they fail to pay it, it becomes an orphan liability to be picked up by the employers remaining in the scheme.

The law has long been the focus of intense criticism for the extraordinary burden it can place on small employers in particular.

Tales of small plumbing businesses facing potentially crippling debts, with their owners forced into selling their homes or else declare bankruptcy, have led to calls for the law to be changed.

Ex-plumber still saddled with debt

Mr E’s claim to the ombudsman sought to argue that the money was not recoverable because it was subject to the Limitation Act 1980, which sets time limits on certain actions. 

His second claim was that Condition I of the Occupational Pension Schemes (Employer Debt) Regulations 2005 — where a debt due has been excluded from the assets of the scheme because the trustees have deemed it unlikely to be recovered “without disproportionate cost and within a reasonable time” — had been satisfied before the certification of the Section 75 debt, and therefore it was not due.

Mr E submitted that as he had been retired for eight years, owning no business or property, and because he and his wife were both in their seventies and suffering long-term health conditions, that there was no way he could be expected to pay the amount demanded by the trustees.

However, the ombudsman sided with the trustee in finding that it could not be shown that the trustee had made a legally effective decision to exclude the Section 75 debt.

Anthony Arter also said that the scheme, being established under Scottish law, only sees limitation periods begin once debt has been certified, which it has not in this case.

The ombudsman did warn that though Condition I had not been satisfied in the past, “the trustee should still consider, before taking any steps to certify and collect any Section 75 debt from Mr E, whether Condition I has now been satisfied in relation to him”.

He also ruled that trustees’ delay in notifying Mr E constituted maladministration due to the considerable stress it placed upon him. As a result, the trustee has been ordered to pay Mr E £1,000.

Trustees’ delay criticised

The plumbing scheme’s treatment of small employers has brought it under intense scrutiny from employer groups, regulators and politicians.

Court documents filed in March explained that the trustee had held off recovering employer debts when the duty to do so appeared in 2005, as scheme representatives hoped to successfully lobby for a change in the law.

But they also admitted a litany of errors, including wrongly advising one employer that in the event of a management buyout a Section 75 debt would not be payable. The exit fee for that employer now stands at £851,000.

Criticism of the scheme’s governance led to an independent review being launched in September. Since then the scheme’s chair of nearly 40 years, Bestrustees chair Alan Pickering, has resigned to an independent trustee director role on the scheme, replaced by ex-actuary Jon Bridger, of KB Independent Trustees.

Two new trustees have been appointed, including former Plumbing Employers Action Group director Garry Forster.

The scheme’s belated pursuit of hard-up former plumbers has also been contrasted with its rude financial health — a recently completed triennial valuation saw the scheme funded against 99 per cent of its liabilities when valued on a low-dependency basis. The deficit was £31m at April this year.

Conservative peer Ros Altmann told Pensions Expert that the case of Mr E represents a failure on the part of the trustees, but also on the part of the government, which has refused to change the law to afford more protection to small employers.

“The real problem here is that the trustees have not been willing to apply Condition I to Mr E, and also that the government has not been willing to change the legislation on Section 75 as it relates to unincorporated employers in multi-employer schemes,” she said.

“Clearly, the trustees have added to the distress by delaying their demands, failing to inform departing employers for many years, and refusing to apply Condition I.”

Baroness Altmann added that she had been encouraging the government to amend the legislation to reflect the fact that “this treatment of good employers was never meant to happen”, but as yet “it has consistently rejected these requests”.

In a statement, a spokesperson for the scheme told Pensions Expert: “Plumbing Pensions recognises that pursuing significant sums of money from small business, like Mr E, is very stressful and distressing.”

The spokesperson said that, though the trustee disputes the ombudsman’s conclusion on the maladministration point, it had concluded appealing the decision was not a good use of scheme resources.

Adding that the trustee could only go by the law as written and not as they might wish it to be, the spokesperson added: “We would ask that stakeholders recognise the complex nature of this situation, and the limitations imposed by the wording of the employer debt legislation, and use their influence with UK government to work to make appropriate changes to that legislation.”