With the Plumbing and Mechanical Services (UK) Industry Scheme currently issuing section 75 debt notices to employers, Craig Looker, Director in the Pensions Team at Walker Morris LLP,  provides advice for employers on what options are open to them.

Recent headlines in some of the financial papers have brought into sharp relief the problems that some in the trade are having with pensions. It appears that the Plumbing and Mechanical Services (UK) Industry Pension Scheme – an industry-wide final salary pension scheme used by many employers in the plumbing industry – is to issue section 75 debt notices, and firms are understandably troubled by this move.

The question for employers is why are they now set to receive these debt notices? Why is it being claimed that a debt is owed to the scheme and what can those employers do about it?

Why might an employer owe a debt to the scheme?

The scheme operates as a single ‘pension pot’. It is not made up of separate pots for each employer and it makes no difference whether or not the employer still has employees who contribute to it. 

An employee stops contributing to the scheme when they either retire or leave employment with their firm or company. As the scheme operates as a single ‘pot’, pension law says that when a firm or company stops having any employees contributing to the scheme, a debt is triggered by that firm or company. The reason for this is that the firm or company is treated as leaving the scheme when it no longer has any employees contributing to it. The triggering of a debt is justified by policy makers as a final opportunity for the scheme to recover cash from the departing company or firm to pay for its former employees’ pensions.

For employers who have stopped having employees contributing to the scheme after 2005, the ‘section 75’ debt is potentially expensive, calculated on the same basis as if an insurance company agreed to cover the pensions of all of the ex-employees of that firm or company. Where an employer stopped having contributing employees before 2005, there is less of an issue, as the debt was calculated on a much less expensive basis.

The trustees of the scheme have carried out a project to check which industry employers triggered section 75 debts in the past, but have not paid them, and has begun to serve notices on those employers setting out the amount of the debt.

How do the trustees calculate the section 75 debt?

The section 75 debt is based on how many ex-employees of the firm or company paid contributions to the scheme, how long they worked for the firm or company, how long they were contributing to the scheme, and their salaries when they stopped contributing.

It is also based on a scheme-wide element. Some employers have left the scheme without paying any debt, either because they became insolvent, or because the law at the time they left did not require any debt to be paid. The scheme has a significant shortage of money relating to these employers who left in the past and this shortfall is referred to as an orphan liability.

The section 75 debt for an employer therefore also includes a portion of this orphan liability, which is spread across all of the employers who are still in the scheme.

Step one is to check that the trustees’ information is correct. The trustees will have based the section 75 debt notice on the information held by them, including the value of the debt claimed. A key step for an industry employer is to check that the trustees’ records are correct. Some basic elements to check with the trustees are below:

  • Are the trustees right to say that a company or firm has stopped having employees paying contributions to the scheme?
  • Do the trustees have the right date for when this happened?
  • Check the records for details of which ex-employees contributed to the scheme. Do records on how long they worked for the company and their salary when they left employment match those held by the trustees?
  • Did anything else happen to the company or firm in the past, such as a sale of all or part of the business, which might affect any debt due?
  • The second step is to consider using the law to argue that you do not have to pay the debt. Employers may want to seek legal advice if they think that there are good grounds for pushing back on the section 75 debt demand. The following sets out some reasons in law which employers could consider for arguing that the debt is not payable:
  • Check how much of the debt is made up of the cost of other employers who left the scheme in the past without paying any debt (‘orphan’ liabilities). An employer may seek to argue that the trustees are not justified in requiring it to pay the amount demanded for this part of the debt
  • If the last employee stopped contributing to the scheme more than six years ago, an employer could try to argue that the usual six-year time limit for claiming a debt applies and it is too late to claim it
  • Where the debt was triggered a long time ago, employers could suggest that they were not notified of the debt and its amount in a reasonable time and so do not have to pay
  • Where the last employee stopped contributing to the scheme more recently, there may be options to defer the debt or prevent it from being triggered by having a new employee start contributing to the scheme.

The receipt of a section 75 debt notice will come as a shock to many employers in the industry, particularly given the amounts often claimed. Employers may be faced with no option but to pay the debt, but it is worth considering if the debt is calculated correctly and whether there might be grounds to push back on it.