A private members’ bill submitted by Scottish National Party MP Alan Brown last week could see the Pension Protection Fund taking on so-called orphan liabilities from multi-employer pension schemes.
The bill looks to change the basis by which the exit fee of an employer leaving a multi-employer scheme is calculated, in the event that their scheme is underfunded, from the section 75 basis to the typically lower technical provisions basis.
A departing employer must also pay its share of orphan liabilities, which relate to the benefits of members previously employed by companies that have since left the scheme.
I just don’t think it’s fair to force a calculation on a buyout basis
Ian Neale, Aries Insight
The government consulted last year on s75 debt. Legislation implemented in April this year has allowed exiting employers to defer this debt payment, under a ‘deferred debt arrangement’.
Organisations have bemoaned the existing legislation and the shock of triggering s75 debt as responsible for their keeping of schemes open to accrual, leaving them ‘trapped’ in multi-employer schemes.
Exit debts risk crushing small employers
The bill was due to be debated on June 15, but Brown chose to withdraw and reschedule its discussion in anticipation of it being potentially blocked by other MPs. The second reading is currently scheduled for July 6.
It calls for the PPF to take responsibility for multi-employer scheme liabilities “if those liabilities cannot be attributed to a particular employer under the scheme using criteria specified in regulations made under this Act”, and “the value of the assets of the scheme at the relevant time is less than the amount of the protected liabilities at that time”.
Alan Brown, MP for Kilmarnock, said he was first made aware of the issue by a constituent faced with exit debts “putting undue liabilities” on himself and his company.
The problem is particularly bad for “small employers, most of whom are incorporated, so it effectively means they’ve got unlimited liabilities” which risk people “losing their homes and any assets owned”.
Jane Kola, partner at Arc Pensions Law, described the bill as a "real watering-down of the current legislation".
"If it had been looked at 10-15 years ago then it might have been seen as a middle ground from what we had before and the minimum funding requirements that we ended up with," she said."This feels like a real going backwards rather than going forwards. It's probably 10 years too late," she added.
Schemes should not be paying the liabilities of others
Calculating exit debt on a technical provisions basis, which is based on the scheme’s funding level, would lower the financial toll for an employer departing from a multi-employer scheme.
The option of agreeing a deferred debt arrangement presently offers an exit strategy for employers while ensuring the scheme remains properly funded.
One sceptic, however, described it as a ‘Sword of Damocles’ hanging over employers.
Claire Carey, partner at law firm Sackers, said that use of a deferred debt arrangement gives the exiting employer “the scope to actually come up with some other arrangement in agreement with the trustees”.
Carey observed that the bill is seeking for “more ways in which the employer debt can be dealt with”.
It looks to address concerns that “non-association employers shouldn’t be picking up the tab for other employers in the same scheme, and we should be lessening the level of the debt,” she said.
She warned that lessening the level of the debt based on technical provisions can present dangers when schemes are left with only one employer.
“What is the level of the liabilities going to be at that point, and who is actually going to be responsible for that?” she asked.
Does the current legislation work?
The Plumbing & Mechanical Services (UK) Industry Pension Scheme first sought a consultation with the government in 2016 over a departing employer’s exit fee.
It has since undertaken a second consultation, which closed on April 30 2018. Ian Neale, director at pensions intelligence service Aries Insight, described the scheme as a “victim of legislation which is simply unworkable”.
“I just don’t think it’s fair to force a calculation on a buyout basis,” he said, which currently takes place in accordance with s75 of the 1995 Pensions Act.
“We know why this was set up in the first place – mainly to deter wilfully abusive employers from dodging their responsibilities, but the current situation is simply unacceptable,” he added.
More than half of charity DB schemes are now closed to accrual
Charities are catching up with private sector employers as the number of defined benefit schemes closed to accrual jumped to 58 per cent at February 2018 from 43 per cent a year earlier, according to consultancy Hymans Robertson.
The scheme currently has more than 350 contributing employers and a membership reaching above 35,000.
Neale observed that many businesses participating in the plumbing industry pension scheme are very small companies, often with only one worker.
Those participating in the scheme can be prevented from retiring if they are unable to pay the s75 debt, or even forced into liquidation, Neale claimed. “It’s a very grim situation indeed,” he said.
