Plumbing companies will be asked to pay pension bills which could reach millions of pounds as the industry-wide defined benefit scheme pursues accrued debts.
The Plumbing and Mechanical Services (UK) Industry Pension Scheme will, for the first time, be issuing section 75 debt notices after initiating a data matching exercise to find old employers that didn’t pay what they owed when they left the scheme.
Some 150 debt notices are estimated to be issued, which might make some of the companies insolvent, Kate Yates, Plumbing Pensions administrator chief executive, told FTAdviser.
The Plumbing scheme is one of the few multi-employer pension schemes in the UK and according to current legislation, liabilities from one sponsor become the responsibility of other companies in the pension fund when one of these leaves the scheme.
This happens in cases of insolvency or when the company stops employing active scheme members.
When a company leaves the scheme, this creates a section 75 debt for that employer. If this isn’t paid at that time, it will become an orphan liability to other scheme sponsors.
The Plumbing scheme has more than 35,000 members – of which 3,200 are active - and assets of £2bn.
According to the last actuarial valuation, in 2017, the pension fund has orphan liabilities around £400m.
Ms Yates noted that actuaries were still calculating the current total value of section 75 debt notices being issued, but these will range "from tens of thousands to millions of pounds".
She argued that it was going to be "extremely worrying and destressing" for any of these companies, because the sums of money could be "quite significant", and it might result in their business ending, the company becoming insolvent and people losing their jobs.
But there would be some ways to defer the payment of the debt, she added.
Ms Yates explained that this was the first time the scheme was issuing these debt notices since the trustees “have spent many years considering how best to apply the legislation in a fair and equitable matter”.
The legislation on this matter was changed over the years and has exacerbated this issue, she argued.
The plumbing scheme has had around 4,000 employers since its inception, and many of these companies were able to leave the scheme before the employer debt legislation even existed, she said.
The section 75 debt requirement was introduced in 1997 and assessed on the minimum funding requirement.
According to Ms Yates, the scheme was always funded well in excess of this, so employers were able leave the scheme without having to pay anything
In 2005, the legislation was changed, and the employer debt started to be calculated on a buy-out basis – in which an insurance policy is issued to each pension scheme member individually.
Adding to this, the legislation also requires employers to make a contribution towards the orphan liabilities not linked to participating employer, Ms Yates explained.
She said: "Because of the nature of our scheme, having so many past employers, and the retrospective aspect of this legislation, the orphan liabilities are a really significant sum of money."
Scottish National Party MP Alan Brown introduced a private members bill in 2018 on this matter, which proposes that section 75 debt is set on a technical provisions level.
The matter was considered by the Department for Work and Pensions in its DB white paper, published in March 2018, where it stated that “there is insufficient justification to warrant amending the measure of calculation of these debts”.
Ms Yates said that the scheme is nearly fully funded on a self-sufficient basis, but on a buy-out assumption, it has a shortfall of about £430m.
She said: “That is one of the challenges we have, the scheme is really well funded, members’ benefits are secure, we are able to pay benefits in full to everybody.
“But for employers, if they want to leave, [we need to tell them] there is a shortfall and they need to pay in some money. It is quite a very difficult message to get across.”
In the meantime, the Plumbing scheme will probably close to future accruals during this year, to avoid a necessary increase in contributions to almost double the rate they are at now.
After positive feedback from employers, the scheme trustees are now analysing the members’ opinions on this matter, and are expected to come to a conclusion in the next few weeks.
maria.espadinha@ft.com
