Plumbing scheme plans to seek guidance from Scottish courts as government drags feet on s75

Multi-employer schemes and their non-associated employers could be in for a surprise if a leaving employer does not agree on how much it owes the scheme.

Trustees of Plumbing Pensions – an industry-wide defined benefit scheme with 415 active contributing companies – began a consultation with a departing employer on May 1 on how to calculate its s75 debt, which has now been extended to August 31 due to the contentiousness of the issue.

The iniquity is that the trustees haven’t been collecting debts when they have fallen due in the past. Why haven’t they taken advice?

Anne-Marie Winton, ARC Pensions Law

Under current legislation, when a company in a multi-employer scheme chooses to opt out it is obliged to pay an exit fee called an s75 employer debt if there are not enough funds in the scheme to pay member benefits.

In addition, the departing employer must pay its share of 'orphan liabilities', which relate to the benefits of members who were employed by companies that subsequently left the scheme.

However, current legislation does not distinguish between multi-employer schemes in which all employers are part of a group, and between those, such as Plumbing Pensions, where they are unconnected.

This means that when an employer chooses to opt out, it becomes responsible for liabilities built up by companies it has no connection to, and which might even be its competitors, by having to pay both s75 debt and orphan liabilities.

Existing legislation is not working

Kate Yates, deputy pensions manager at Plumbing Pensions, said: “The existing legislation doesn’t work as it should for our scheme.” She added that the scheme is lobbying the government to find a solution.

However, she said, it was frustrating that despite lobbying since 2005 the government has moved slowly on the issue. Now, she said, “with changing pensions ministers, there is no continuity”.

Yates said she thinks it is likely that the trustees might take the case to the Scottish courts (as the scheme is registered in Scotland) to obtain guidance on its interpretation of how to calculate the departing employer’s s75 debt.

Yates noted that for many employers, “this is the first time they’re aware that they will have to pay an exit fee”.

She added: “The trustee is concerned about the financial and personal impact this legislation has on the owners of plumbing businesses.”

Small, unincorporated employers are in an even worse position, she said, as “their lifetime savings are at risk”, making it harder for trustees to appeal to them for debt payments. “The law can’t have intended this.” 

The Department for Work and Pensions issued a call for evidence in 2015 regarding s75 of the Pensions Act 1995 employer debt in non-associated multi-employer schemes, after lobbying by schemes and industry bodies to address their concerns.   

A spokesperson said: “We are currently considering responses to our call for evidence on potential changes to s75 and will report back in due course.”

Small number affected

Anne-Marie Winton of Arc Pensions Law, a lawyer involved in the consultation, pointed out that few UK multi-employer schemes are comprised of non-associated companies, making this case exceptional.

One of the issues is that no one is responsible for informing employers of pensions law when they join, said Winton, meaning many sign a contract that obliges them to follow pensions law blind.

She noted the matter had been “kicked into the long grass” by the government.

“It would be a scandal if many family businesses were bankrupted,” she said, but added that due to the complexity of calculating the debts, it might take “years before this explodes”.

The case, she said, is troubling. “The iniquity is that the trustees haven’t been collecting debts when they have fallen due in the past,” as they might not have known how to start the process. “Why haven’t they taken advice?”

A downward spiral

François Barker, partner and head of the pensions group at law firm Eversheds, said: “The law traps companies in a scheme like this.”

All the options for departing employers are unpalatable

François Barker, Eversheds

In theory a departing employer has two options: walking away or closing the scheme to accrual, he said.

If they walk, they take on their share of a debt that does not only relate to them. The second option is practically unavailable, since the employer does not control the scheme, having simply bought into it. “All the options are unpalatable,” he said.

Because non-associated multi-employer schemes are almost by definition comprised mostly of small employers who cannot afford to establish their own schemes, they lock firms into “a downward spiral”.

“We have to find a way to break that cycle,” Barker stressed.

To this end, when the government issued a call for evidence, several lawyers proposed introducing a "third option” – a mechanism that allows employers in such schemes to stop accrual without walking away and triggering s75. “Will they adopt it? I don’t know,” said Barker.

The best case for an employer is getting more time to pay a debt, Barker explained. 

But Barker pointed out that, as a priority, s75 is “miles down the list” at the moment for the government.