A Scottish National Party (SNP) MP has introduced a private members bill on multi-employer defined benefit (DB) schemes which could increase the number of savers ending up in the Pension Protection Fund (PPF).
Alan Brown, MP for Kilmarnock and Loudoun, is proposing to change the current legislation, which sees liabilities from one employer becoming the responsibility of other companies in the pension fund.
This happens in cases of insolvency, or when the company stops employing active scheme members, for example.
These accrued debts, known as orphan liabilities, increase when employers leave the scheme, despite these companies having to make a cessation payment in these occasions, known as a section 75 debt, since new legislation was introduced in 2005.
According to Malcolm McLean, senior consultant at Barnett Waddingham, these payments “can sometimes be unaffordable and have led on occasions to insolvencies”.
Mr Brown’s bill wants to remove the obligation on employers in these schemes to fund their share of any orphan liabilities, which should be guaranteed by the pensions lifeboat in a last resort situation.
This would mean that the members of these schemes could end up with a benefit cut of 10 per cent, as the PPF pays less to their members than pension funds.
Mr Brown decided to put forward this bill after becoming aware of the problems with multi-employers’ pensions due to the fact that his dad is a pensioner at the Plumbing and Mechanical Services (UK) Industry Pension Scheme.
He said: “From 1995 until further changes in 2005, the fund was assessed on a minimum funding basis.
When valued like that, the scheme was deemed to be fully funded, so any employer leaving the scheme did so without detriment to the overall scheme and employers remaining in the scheme.
“However, in 2005 the assessment of such schemes was altered to a buy-out basis.
“That process can be up to three times more expensive in its valuations, and it has been applied retrospectively, so companies that previously left the scheme in good faith and did not have to pay any shortfall—because there was not one—are now deemed to have created a debt for the scheme.
“That debt cannot be recovered, so it is passed on to the remaining employers.”
Due to this, Mr Brown’s bill is also proposing that section 75 debt is set on a technical provisions level, which is a much lower bar than the current requirement.
Mr McLean argued that the government has already relaxed the rules on these cessation payments, since the Department for Work and Pensions (DWP) introduced new rules this year which allow employers “more time in which to pay off liabilities under a deferred debt arrangement (DDA), provided certain conditions are met”.
He said: “Employers whose only change is to stop employing active members in a scheme are allowed to retain an ongoing commitment to the scheme, making contributions on an ongoing basis rather than be forced into a one-off cessation payment.
“This may not be a perfect solution for every situation but is probably as far as the government is prepared to go to ameliorate the problem for those primarily affected.
“The private members Bill although clearly well intentioned, is unlikely to be supported by the government at this point in time.”
Alistair Russell-Smith, head of corporate DB at Hymans Robertson, argued that “reducing the Section 75 debt and removing exposure to orphan liabilities would be a great outcome for employers in these schemes, but in practice would be a very big ask, it would leave the trustees of these schemes in a more vulnerable position and increase the risk to the PPF”.
He said: “I would therefore be surprised if these proposals make significant progress through Parliament.”
But Sir Steve Webb, director of policy at Royal London and former pensions minister, said if the Bill was passed many other schemes would want to put their liabilities into the PPF.
"It is hard not to sympathise with the businesses still in these multi-employer schemes, but the solutions in this Bill would create new unfairness’ and problems of their own.”
Martin Bamford, chartered financial planner for Surrey-based Informed Choice, argued that “as a PPF levy payer, members of the scheme in question should have access to the PPF as an option of last resort”.
He said: “Any legislative change which could result in people receiving a lower than expected pension income should be properly scrutinised.
“This Bill is at an early stage of the parliamentary process and it will be interesting to see how it progresses.”
Mr Brown’s Bill was originally scheduled to be discussed tomorrow (15 June), since private members Bill are only debated on specific Fridays.
However, since there was a long list of new Bills to discuss, there was a low chance of it being debated tomorrow. According to the Parliament website, the proposed legislation is now set to be debated on 6 July.
maria.espadinha@ft.com
