The Plumbing and Mechanical Services (UK) Industry Pension Scheme is used by many employers in the plumbing industry. The scheme’s closure to future benefit accrual on 30 June 2019 has left employers and employees alike wondering about the practical impact of the move. Craig Looker, Director in the Pensions Team at Walker Morris LLP, explains.
For more than 40 years, the Plumbing and Mechanical Services (UK) Industry Pension Scheme has offered employers in the plumbing sector a good quality pension scheme for them and their employees. The scheme also paid out a lump sum death benefit, based on a multiple of earnings where an employee died in service.
Many companies have used the scheme as their default pension arrangement for many years, from one and two-man businesses, up to much larger plumbing companies. Following a consultation with members and months of negotiation, however, the scheme closed to future benefit accrual on 30 June 2019.
What are the immediate issues for employers?
The closure of the scheme to benefit accrual means that employees who were contributing members up to 30 June 2019 will no longer earn any more pension in the scheme and all regular contributions stop at that date. It also means that employees are no longer eligible for the lump sum death in service benefit provided by the scheme.
From 1 July 2019, those employers no longer have a pension scheme for their affected employees, and so will be in breach of their obligation to automatically enrol all employees into a pension scheme unless they put a new pension scheme in place with effect from that date.
Employers had six weeks from 1 July 2019 to put their new scheme in place, but must backdate the new scheme and the pension contributions to 1 July 2019. Employers may wish to seek advice from a pension consultant or Independent Financial Adviser on choosing an appropriate replacement pension scheme.
The new automatic enrolment pension scheme is likely to be a defined contribution pension scheme, where the employer and employee pay pension contributions into a pension pot, which is then invested on behalf of the employee. There is no guarantee as to the level of benefit they will receive, in contrast to that provided by the previous scheme.
Employers will need to decide how much they want to contribute to the new scheme and how to communicate these pension changes to employees.
Employers should also consider whether to provide a lump sum death in service benefit to their employees. There is no obligation to do so but, if employers do not intend to replace the benefit provided by the scheme, they should communicate this clearly to employees – the employee may want to consider purchasing their own life cover. If employers wish to continue to provide a lump sum death benefit, they will need to obtain insurance cover for this, and again may wish to seek advice on an appropriate provider.
What does the closure mean for employees?
Employees who were contributing members of the scheme until 30 June 2019 may be concerned about their pension earned up to that date. They can be reassured that this will remain in the scheme as a frozen benefit. It will increase each year by a method linked to inflation and, when the member comes to retirement, their frozen pension will be paid to them for life. The employee will not have to pay any further contributions to the scheme.
Employees can transfer out their benefits from the scheme to a different pension, but must take independent financial advice before doing so and should take care to ensure that it is the right decision for them.
For the future, employees must be provided with a new pension scheme from 1 July 2019 and their employer should inform them of the contributions that the employee and employer will pay into that pension scheme.
What are the long term issues for employers?
Although the regular employer contributions to the scheme stop on 30 June 2019, it is possible that, in the future, a deficit may arise in the scheme between the assets held and the cost of providing the promised pensions to members. If so, the scheme would seek contributions in proportion to each employer’s share of the scheme from employers to plug this deficit. While the scheme has not had to seek such contributions in the past, many similar pension schemes have done so.
Employers may want to consider how they can exit the scheme completely to avoid this risk, but it is not easy to do this. Employers can release themselves from liability to the scheme under the law by giving notice to the Trustees of the Scheme, but this would trigger a Section 75 debt, due from the company or firm to the scheme.
These debts are likely to be significant for most employers and so are often unaffordable.
Employers who wish to exit the scheme would also have to do so under its governing rules, but there is a suspension of employer departures under the rules which is currently in place until the end of 2019 and may be extended beyond then. Any employer wishing to leave the scheme entirely would have to wait until 2020 at the earliest, again assuming that they could afford to pay their section 75 debt.
The closure of the scheme means that companies and firms in the plumbing industry need to think about a new pension scheme, and possibly a new lump sum death benefit, for their affected employees. Employers also need to consider whether they want to exit the scheme completely in the future.