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Debt legislation proves a wrench for plumbing scheme

Debt legislation proves a wrench for plumbing scheme

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The trustees of the industry-wide plumbing pension scheme have announced that the scheme will close to future accrual from 30 June 2019. The 35,000-member scheme, established over 40 years ago, has faced the same challenges as countless other defined benefit arrangements that have closed to accrual in recent years. However, unlike most other schemes, a key contributing factor has been the threat posed by employer debt legislation to the ongoing security of benefits.

The plumbing scheme has more than 400 contributing employers and total assets in excess of £1.5 billion. Under employer debt regulations, in the event that an employer ceases to employ an active member, they are required to pay a Section 75 debt into the scheme. The debt is calculated as the employer’s share of the scheme’s deficit on a ‘buy-out’ basis, which tests whether there are sufficient assets to secure the benefits with an insurance company. At 31 October 2018, the plumbing scheme’s buy-out deficit stood at £430m.

Significantly, the Section 75 debt for an employer in a multi-employer scheme includes a portion of ‘orphan’ liabilities, in respect of any companies who previously went bust without paying the full amount of their debt. This has led to many employers of the plumbing scheme facing onerous debts that, if called upon, would leave them facing bankruptcy. However, Section 75 debts are not triggered when all of the employers cease to participate in the scheme at the same time. As a result, those employers with few remaining employees will no longer face the imminent threat of paying a debt following the closure of the plumbing scheme in June.

From the trustees’ viewpoint, the key consideration in reaching the decision to close the scheme will have been the security of benefits. Security could have been jeopardised if the payment of Section 75 debts in the future had led to a large number of employers becoming insolvent. Kate Yates, the chief executive of Plumbing Pensions (UK) Limited, described the decision to close the scheme as the ‘most responsible and practical way’ to ensure that benefits are paid out in full in the future.

The primary purpose of employer debt legislation is to protect the security of members’ benefits. However, in the case of the plumbing scheme, the threat posed by Section 75 debts has been the driving factor behind the closure of the scheme. The active members now face the prospect of joining defined contribution arrangements, under which they will take on the bulk of the risks rather than the employer. This raises the question of whether employer debt legislation has unintended consequences, that could lead to other industry-wide schemes choosing to close to accrual.