Section 75 debt regulation is inadvertently causing huge financial distress for employers in the industry-wide plumbers' scheme. After years of inaction the government must urgently find a solution, writes Stephanie Baxter
The plight faced by small employers in industry-wide pension schemes is a classic example of the unintended consequences of regulation. Legislation introduced years ago to increase the commitment on employers in honouring pension promises to protect members is inadvertently causing some firms major torment.
This is particularly the case for small plumbing firms in the Plumbing and Mechanical Services Industry Pension Scheme. Some could face bankruptcy because in addition to their own liabilities, they are also liable for a proportion of pension debt of past employers who have left the scheme or gone bust - called orphan liabilities.
The law requires employers to pay section 75 debt upon certain triggers, such as leaving the scheme because they have no more active employees in the scheme. It is also triggered if the employer goes out of business or the owner wants to retire. The situation is not helped by the debt being based on a buyout basis, making it more costly than under technical provisions.
It particularly affects small employers without limited liability status, as owners can be held personally liable for the firm's debts.
Federation of Small Businesses (FSB) national chairman Mike Cherry says: "We have had some FSB members affected by this, and it clearly has the potential to be financially devastating for those involved. FSB has raised this with the Department for Work and Pensions (DWP) and await the department's proposals to resolve this difficult issue."
The plumbers' situation has been called a ‘scandal', a claim strongly rejected by the scheme's trustee chairman Alan Pickering.
"This isn't a scandal, as that would suggest people have behaved badly but nobody has here. We are victims of the political system, and one symptom of that is a lack of continuity and knowledge in government departments," he says.
"Nobody has done anything wrong - even political changes were well-intentioned but had unintended consequences."
There is uproar over why DWP has still not resolved the matter despite having consulted on the section 75 debt issue for non-associated multi-employer schemes back in 2015. Former pensions minister Ros Altmann says she started work on the matter in summer 2015.
Yet current pensions minister Richard Harrington told MPs last October he was looking into the matter and hoped to issue a formal consultation soon. The issue seems to be that DWP sees this as a very complex policy, and wants to take time to ensure it analyses everything properly.
A DWP spokesperson said: "This is a unique situation and we are reviewing these arrangements to explore other ways of dealing with potential debt."
Find a solution
The plumbers' scheme wants to have a lock-in with civil servants and ministers to look at the potential options, and discuss how to come up with a solution.
The difficulty is finding a solution that strikes the right balance and does not compromise member protection.
Pickering says the real challenge is not to overstate the problem, pointing out the scheme was fully funded on technical provisions in 2014. Now it is estimated to have a £1bn deficit. Yet in a few years' time if there are interest rate increases, the level of debt could be a fraction of what it is now.
"Time could be a great healer. I wouldn't want to put too much faith in future market movements but we have time, as we're reasonably well funded on an ongoing basis.
"It's just the haphazard timing associated with section 75 trigger events that really causes the angst for small family businesses who have been going the right thing by their workers since 1975 (when the scheme started)."
There are a number of family plumbing businesses where the proprietor wants to retire or pass business to someone else - which often will be a trigger event.
"If we can find a way of avoiding such a trigger or controlling the way in which it occurs, then time will be on our side," he adds.
Spence & Partners owner David Davison says the real issue is the timing of the payment of the debt, which currently creates a "cliff edge". "Giving employers the flexibility to continue to pay down benefits on a technical basis, means they can choose at what point they want to settle the cessation debt."
The threat of triggering a large debt can drive perverse behaviour among employers. Sarah Woodfield, senior policy adviser at Pensions and Lifetime Savings Association (PLSA), says this encourages employers to think how to avoid triggering the debt, such as keeping one or a few employees in the scheme and accruing benefits. This can put members and other employers in the scheme at greater risk.
The PLSA believes the best solution would be to trigger the debt when the employer's last active member departs, but calculate it on technical provisions rather than a buyout basis.
While it is a knotty issue that needs to be considered carefully, the plight of plumbing firms clearly needs urgent action. Davison says it's not a complicated issue but just needs some will to try to address it.
There have been rumours it may be addressed in the DWP's forthcoming green paper on defined benefit reform, but was unconfirmed by DWP.
"We need it quickly - in January rather than June," says Pickering. "The longer the uncertainty persists, the more employers and employees fear the worst."
The Pensions Regulator (TPR) has been granted £3.5m of additional funds to boost its compliance and enforcement work, its non-executive chairman Mark Boyle has said.
Paul Pettitt will leave Origo next year after 28 years with the financial technology company that has played a key role in developing the pensions dashboard.
The watchdog's approach has become too aggressive in the last year and it seems to be moving away from a risk-based approach, according to Peter Askins.
Businesses who use a net pay arrangement for defined contribution (DC) funds should reconsider enrolling their lowest earners into that scheme, Baroness Ros Altmann has said.