A plumbing company is going to wind up after receiving a £395,200 bill from its pension scheme.
Darren Cooke, a chartered financial planner at Red Circle Financial Planning, advises the company's owner, who has “had no choice” after receiving the debt notice, seen by FTAdviser.
He said: "My client received a notification regarding a period back in 2015 where the previous employee left the company, he retired. It took the company four or five of months to get them a replacement.
"When they hired someone else, they enrolled him into the scheme. But two weeks ago, they received a notification that they owe £395,200.
"This a company that only turns around £60,000 and the last year made a profit for the first time in three years."
Mr Cooke explained that winding up the company – with only one employee who will be made redundant – would cover about a quarter of the debt notice.
FTAdviser reported earlier this week (April 23) that the Plumbing and Mechanical Services (UK) Industry Pension Scheme has started issuing section 75 debt notices for the first time after a data matching exercise to find old employers which didn’t pay what they owed when they left the scheme.
The Plumbing scheme is one of the few multi-employer pension schemes in the UK and current legislation means 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.
The section 75 debt requirement was introduced in 1997 and assessed on the minimum funding requirement.
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 – which increased the orphan liabilities.
According to the last actuarial valuation, in 2017, the pension fund has orphan liabilities around £400m.
Mr Cooke said: “It is absolutely shocking. Before the rules changed, employers were able to walk away, with no debt, and paying nothing. A huge number of employers are now in dire straits.
“Some of the employers getting these notices are sole traders, technically the trustees can tell them 'I'll have your house then'.
“My client at least is a limited company, he has protection in that regard - he can wind up the company and he won't have any personal liability.
“But he has paid absolutely every penny that he was required to pay by the scheme.”
Kate Yates, the pension scheme's chief executive, argued that it was going to be "extremely worrying and destressing" for any of the companies receiving these debt notices, 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.
She said: “Hopefully it won't happen, because there are ways to defer the payment of the debt.
“For a small incorporated family run business, they could become a limited company and transfer the pension liability into the limited company, which gives them some protection, it means their personal wealth isn't at risk.
“For a business that has changed hands and triggered a debt, or even where they continued trading but they haven't always had a plumbing operative, that would have triggered a debt. A deferred debt arrangement would help them.”
Mr Cooke’s client has another plumbing business, with its employees enrolled in the Plumbing scheme.
He said: “He is dreading receiving a notification on that one as well. As far as he is aware, he has complied with everything.”
maria.espadinha@ft.com
