Plumbers’ Pension Scheme
I am grateful for this opportunity to raise the issue of the plumbers’ pension scheme, which affects small plumbing businesses in my constituency and in those of my colleagues across this Chamber. Most plumbers are part of a multi-employer pension scheme such as the Plumbing and Mechanical Services (UK) Industry Pension Scheme, which is run by the Scottish and Northern Ireland Plumbing Employers Federation. The scheme currently has more than 35,000 members, more than 350 contributing employers and, as of April 2017, £1.9 billion in assets. Since its inception in 1975, about 4,000 employers have paid into the scheme. Members would now like to know whether the 101%—the assets have been found to cover 101% of the liabilities—currently in the scheme is on a buyout basis or on a technical provision basis.
Fundamentally, this issue is a consequence of section 75 of the Pensions Act 1995, as amended in 2005, which covers what happens when an employer ceases to participate in a multi-employer pension scheme. When a participating employer leaves the scheme, either by becoming insolvent, winding up, changing its legal status or even simply no longer having any active members in the scheme, it becomes liable for a section 75 employer debt, to cover its share of the scheme’s liabilities. The size of a section 75 employer debt can be known with any certainty only when the employer ceases to participate, due to the variety of factors that go into how the debt is calculated, which range from how many scheme members the employer employs and how old they are, to the value of the scheme’s assets and to so-called “orphan liabilities”. Orphan liabilities are those liabilities that cannot be identified from those who have left the scheme in the past. So, in essence, employers leaving the scheme today are on the hook for liabilities incurred by employers who left the scheme years ago.
There is nothing objectionable about the idea of a section 75 employer debt in itself. The premise that employers leaving a pension scheme should leave on terms that protect the integrity of that pension scheme is entirely reasonable. However, the legislation is not suited to the plumbers’ pension scheme, and has inadvertently left many plumbers facing vast liabilities when they come up to retirement. Ironically, a measure designed, in good faith, to protect people’s retirements has in this case put many people’s retirements in jeopardy.
May I draw the hon. Lady’s attention and that of the House to early-day motion 414 of last November, which stands in my name and those of Members on both sides of the House? May I also draw her and the Minister’s attention to the case of Mr Stuhlfelder, a plumber in my constituency, who cannot retire because of liabilities that he would incur? He wants to pass the business on to his workers, but that would deprive him of the pension pot that he has gathered so diligently over many years. He cannot hang around until 2020, and nor should he. That makes the case strongly to the Minister, as does what the hon. Lady has been saying, that we need quick action. We need diligence and prudence, but we need quick action on this matter.
I completely agree with the hon. Gentleman. My constituents also have grave concerns because they could essentially be left with nothing. That is why I shall urge the Government to take up various recommendations later in my speech.
Why then does the legislation have unintended consequences for plumbers? The first issue is that the plumbing industry is mostly composed of small, often family-run businesses that have been established for many years, created local jobs and contributed to their local economies. Such businesses are the lynchpin of our communities. I have huge admiration for this prime example of true, independent entrepreneurialism. They have built businesses that have thus far largely withstood the rise of large corporations and the so-called gig economy.
The legislation is quite simply not made for industries such as plumbing. The turnover of employers leaving the scheme is higher because, of course, many plumbers shut down their businesses when they retire. In many other industries with multi-employer pension schemes, companies tend not to be tied to one specific person and are less likely to close voluntarily, whereas in plumbing there is a steady stream of employers reaching retirement and closing down their businesses, and now suddenly finding themselves liable for huge sums of money.
The turnover of employers, combined with the age of the scheme, has the additional consequence of making the aforementioned orphan liabilities particularly onerous. Much of the scheme’s buy-out deficit comes from employers who left the scheme years ago, and that large liability is now being shared out among currently departing employers. Moreover, although many industries are mostly composed of limited companies, many plumbers own unincorporated businesses, leaving them personally liable for business liabilities such as the crushing section 75 employer debt.
Perhaps a plumber could change their unincorporated business into a limited company, but that in itself could incur an employer debt, leaving plumbers with little room to manoeuvre. They cannot sell the business or even transfer it from parent to child without incurring an employer debt, and nor can they move their employees to a new pension scheme. They are, in effect, trapped in the scheme, with no escape. Plumbers are therefore uniquely and personally exposed to the effects of having to pay a vast amount in employer debt when they retire. Many of the plumbers who have been faced with a massive bill when trying to close down their businesses had absolutely no idea that this could happen to them. It has been a sudden and deeply damaging surprise.
This issue is not 22 years old. The 2005 change from the minimum funding requirement basis to the buy-out basis, which requires a departing employer to pay enough into the scheme such that that employer’s pension liabilities could be bought out with an insurance company, drastically increased the amount for which plumbers could be liable. Until recently, the plumbers’ pension scheme was unable to calculate or estimate section 75 employer debts because the legislation was not easily applicable to the scheme, being as large as it is, and because it did not have all the necessary data. That has had a devastating effect on many plumbers.
I congratulate my hon. Friend on securing this debate. Does she agree that providing clarity is key for so many plumbers in her constituency, my constituency and others throughout the country, because the plumbers are suffering and the impact is on not only them and their employees, but their families?
I completely agree. This issue affects not just the individual, but their company, their family and their livelihood. That is why it was so important to bring this issue to the Floor of the House.
Plumbers have worked hard all their lives and are now in danger of losing everything—their homes, life savings and plans for retirement—when they trigger their business’s employer debt, and all for being responsible, sensible employers who sought to provide for their employees’ retirements. It is a tragic irony made even worse by some of the frankly ludicrous sums involved. Some plumbers are finding themselves liable for hundreds of thousands, even millions of pounds—amounts of money that they could not possibly manage to pay. I urge the trustees immediately to carry out an accurate valuation for these plumbers.
My hon. Friend is making a powerful case, and I congratulate her on securing this debate. I will not be the only Member of this House who has had the distressing experience of listening to the agonies through which these good people are going. They are people who have worked long and hard and built something up for their families, and they now face financial ruin. It is right that the fund’s trustees should undertake a thorough review of all the options, but does my hon. Friend feel that the Government have a part to play in helping to bring clarity to the situation?
I thank my hon. Friend for his intervention and completely agree that there is a role for the trustees to play and a role for the Government to support that process.
On the suggestion about the trustees doing an evaluation, I understand what the hon. Lady is saying, but will that evaluation not just highlight the ludicrous position facing people that she has already highlighted? We need not just an evaluation, but a different way of evaluating debt, because, as was correctly pointed out, this is fully funded anyway. It is actually a change in the legislation that is needed rather than the trustees doing that evaluation.
I thank the hon. Gentleman for his intervention. I do go into that particular point in a little more detail further on.
Plumbers have been checkmated by the legislation. They have no room to manoeuvre, no way out. Every possible move, it seems, will trigger the employer debt and bring it crashing down on them and their livelihoods.
The damage to some plumbers’ mental and physical health, family life, and financial security cannot be overstated. When these constituents appeared at my surgeries, their levels of desperation were evident. For many plumbers, the only option is to carry on—to defer retirement and even take second jobs, and hope that some form of relief comes before it is too late. These people are not fat cats trying to avoid paying their due. For years, they have dutifully paid their contributions into the scheme. They are ordinary entrepreneurs who wanted nothing more than to give their employees a decent pension. That is a principle that I strongly stand by and I know that it is one that this Government stand for, too.
I, too, congratulate my hon. Friend on securing this very important debate. She is speaking about the impact that this is having on her constituents, but I am sure that she also recognises that my Moray constituency has some of the highest number of plumbers affected by this problem. Does she agree that they need answers sooner rather than later? The biggest problem is obviously the funds and the amounts that they are facing, but there is also the uncertainty, and the longer that that goes on, the worse it is for them, their employees and their families.
I thank my hon. Friend for his intervention and completely agree with him. That is why, when I go through my recommendations for the Government shortly, I will also urge for those actions to be taken with immediate effect, so that we can alleviate that pressure on the plumbers in constituencies across the country.
I understand that this is a very complex system and that we should be wary of making any changes too hastily, lest they then have unintended consequences of their own. We do not want to solve this crisis by creating another one, let alone inadvertently make matters worse. Likewise, I recognise and support the principle behind employer debt. We do not want to open the door to companies being able to walk away from a pension scheme and dump its liabilities on other employers. None the less, the system is obviously not working as intended right now. None of the people who contributed to the legislation as it stands today could possibly have envisaged creating a system that has left ordinary plumbers facing, potentially, six or seven-figure bills when they try to retire. This is, self-evidently, not the way that it was meant to work.
There is surely a case to be made for recognising the unique situation of the plumbers’ pension scheme. More flexibility would certainly be welcome, especially with respect to the buy-out basis, unincorporated businesses and orphan liabilities. One could perhaps make the Pension Protection Fund a guarantor of last resort for the scheme’s orphan liabilities, as is currently the case in single employer schemes, so that those liabilities are not included when calculating the section 75 employer debt. As I mentioned earlier, the plumbers’ pension scheme is well funded and is on course to pay all members’ benefits in full, so there is little chance that the PPF’s role as guarantor would ever come into play. There must be a solution to this crisis, and any solution should also address the fact that the plumbers’ pension scheme includes unincorporated businesses where the owner’s house and life savings are at risk. One option could be, for example, to help plumbers seeking to avoid personal ruin by incorporating their businesses and by removing the funding test requirement from the flexible apportionment arrangement regulations in such cases.
Likewise, a solution should address the gross unfairness of employers in the scheme currently having to pay for liabilities incurred by employers who left the scheme before 2005, who did not need to pay anything when they left. I understand that the Government recently consulted on a deferred debt arrangement that would allow employers in multi-employer pension schemes, such as the plumbers’ pension scheme, to defer payment of an employer debt in certain cases. I am also aware that the Green Paper, “Security and Sustainability in Defined Benefit Pension Schemes”, has looked into the issues of unincorporated liability and orphan liabilities, and that a White Paper responding to these issues is coming soon. I hope, therefore, that the Government are looking into all options as to how we can get justice and peace of mind for plumbers, and that they will not delay in making the necessary changes to the system. The sooner this crisis is resolved, the better.
It is worth reflecting on the issue of raising awareness among small businesses of section 75 employer debt and other pension liabilities. Many plumbers affected by this issue were wholly unaware that they could be made liable for such vast quantities of money, and that is not right. We should aim to ensure that small business owners enter multi-employer pension schemes with their eyes open, and that they are properly informed of any changes in the legislation and their potential consequences.
To conclude, the situation facing many plumbers right now is wholly unjust. Small business owners who have done nothing wrong are being penalised by the totally unintended consequences of the legislation as it currently stands. We need action to ensure that the system works as intended, and delivers relief and justice to upstanding plumbers who, through no fault of their own, are going into 2018 with a vast liability hanging over their heads. I urge this Government to take the actions I have outlined today.
I commend my hon. Friend the Member for Angus (Kirstene Hair) on securing this debate on this very important subject. I assure her that I have been listening carefully to her contribution and to those of other hon. Members. I would like to try to provide some reassurance, explain some action that is being taken and answer the individual solutions that she has so sensibly set out.
Since my appointment last June, I have spoken and written to several colleagues in the House who have made representations—much as I have heard this afternoon—on behalf of their constituents. I utterly recognise that it is a worrying situation for the employers in the scheme and for the individual pensioners who are so affected. The previous Pensions Minister committed to look at this issue following previous debates, and we set out some matters in our Green Paper, which was published in 2017. As my hon. Friend outlined in her speech, we will shortly be setting out the response to that in a White Paper. Although I cannot say in advance what the White Paper will say in detail, I will address some of the issues that she has raised. I will also attempt to demonstrate the difficulties we face in what is clearly a very complex area.
Let me first address who this matter affects; there are effectively four or five parties. There are the employers, who continue to be involved with this scheme, and the trustees, who are responsible for ensuring that the pension scheme is run properly and that the members’ benefits are secure. More specifically, there are the members themselves, who have worked hard to build up a pension and deserve to have it paid in full. I should also mention the PPF, which provides vital protection to members of pension schemes whose sponsoring employer becomes insolvent. However, the PPF is funded by levy payers, which are of course other pension schemes, and their sponsoring employers. Therefore, any changes would have a wider impact on the financial levy of other pension schemes and consequences for the amounts that they would have to pay. By any interpretation, this is a complex situation, and building a consensus solution that is fair and equitable to all is extremely challenging. We have to be conscious that this scheme is one of many multi-employer schemes, and that any changes for this particular scheme—however worthy and important it may be—has consequences in some shape or form for other schemes.
It is important to remind hon. Members of the background to this issue. The original legislation was introduced to protect members’ pensions, and was then strengthened in 2005. A key principle is that employers cannot walk away from their obligations if they have promised a pension to their employees. Before they do, they must ensure that members’ pensions are paid in full. In a single employer scheme, this would be through buy-out with an insurance company. The similar arrangement in a multi-employer scheme, as we have here, is the payment of an employer debt. This helps to ensure that members receive the pensions they have worked for and been promised when their own or former employer ceases to participate in the scheme.
The current regime is also designed to protect those employers who remain in the scheme and are also a party to this problem; they would be left to pick up the shortfall left by departing employers. The Government estimate that there are about 25 other multi-employer schemes with a design similar to that of the plumbers’ pension scheme. It would be difficult to consider introducing specific legislation about one particular scheme’s problems, especially as, since 2005, many similar such schemes have paid their section 75 debts and complied with the current legislation. That includes employers who were personally liable for any debt they may have owed.
There are also nearly 1,000 “last man standing” multi-employer schemes in total. To comply with legislation, a debt should be calculated when individual employers ceased to participate in a multi-employer scheme. It is with regret that, since 2005, the trustees of the plumbers’ scheme have been unable to calculate or collect the debts, so the scheme has not been able to provide any estimates on the levels of potential debts. It is therefore absolutely important that all concerned do not create any unnecessary anxiety by speculating about the size of any potential debts before they are calculated. I am pleased that this week the scheme that we are concerned with has announced plans to consult on a methodology for calculating debts in February. That is long overdue. It is vital that that work is now done urgently so that all concerned about all aspects of the scheme, and on all sides, can work together to agree a way forward with employers affected.
I want to use this debate to try to suggest possible solutions and to answer the laudable recommendations made by my hon. Friend in her outstanding speech. Employer debt legislation applies to all schemes, not just the plumbers. The Government are fully aware of the issues that employers have faced in complying with this legislation. A significant number of changes have been made to legislation, in response to representations made by employers, whereby only part of the debt or no debt may be payable. Those arrangements are available under current legislation and are being used right now.
My hon. Friend the Member for Stirling (Stephen Kerr) and the hon. Member for Arfon (Hywel Williams), whom I know well, mentioned plumbers who may be personally liable and are genuinely worried that they may lose their homes. It is worth pointing out that the majority of employers in this scheme are limited companies and are protected through limited liability, but I turn to the situation affecting unincorporated and incorporated employers.
For those who may be personally liable, there is already legislation that could assist. The personal assets of an incorporated employer are protected. Employer debt valuation is not required for an employer to become incorporated. My hon. Friend the Member for Angus mentioned the flexible apportionment arrangement. This is already available in legislation and can be used to help unincorporated employers incorporate without triggering an employer debt. The arrangement has been used by employers in this scheme and is one of the arrangements that can be used to help unincorporated employers, some of whom have been mentioned in correspondence to me and in this debate, provided that the scheme is no worse off from a funding perspective.
I turn to my hon. Friend’s point about the funding test. The Government believe that it would be wrong to remove the funding test as it provides an important protection for both members and the remaining employers. The plumbing pension trustee has a streamlined flexible apportionment arrangement process in place to help small employers wishing to incorporate. Individuals who want more details on this arrangement should contact the plumbing pension scheme to discuss their situation and whether an FAA can help. I urge individuals worried about their personal liability to contact the scheme to discuss their situation in more detail.
Once the debts have been calculated, the scheme trustees can also use their discretion not to pursue a debt when they expect that doing so would represent a disproportionate cost to the scheme.
I turn now to the key issue of a deferred payment scheme. We have recently consulted on regulations, including a new deferred debt arrangement, that will enable employers in multi-employer pension schemes to defer the requirement to pay an employer debt in some circumstances. This is a further tool for those affected by this problem. We aim to introduce these regulations in April, which will provide valuable breathing space for employers, so that they can consider their options on how to meet their obligations.
The issue of orphan liabilities was raised, as well as those relating to members whose employers no longer participate in the scheme. I am aware that the scheme would like to exclude orphan liabilities from the calculation of employer debt. That requirement to meet a share of orphan liabilities is common to all multi-employer schemes and is an integral part of member protection. I understand that the scheme has substantial orphan liabilities from employers that have departed it, but it is important to note that these liabilities are dated from the period both pre and post-2005. Changing legislation to enable schemes to accept less money when they are underfunded simply passes more risk on to members as it moves schemes further away from being able to secure members’ benefits in full.
I await the White Paper, but the Government’s provisional view is that it would not be right or fair to pass this burden on to the PPF and its levy payers, which are, of course, other pension schemes, and their sponsoring employers, who have no connection with, or responsibility to, the scheme. The legislation only requires departing employers to pay an employer debt when there are insufficient funds in the scheme to secure members’ benefits in full.
Several people talked about the funding of the scheme. In 2014, as an ongoing technical provision, the scheme was funded to the tune of 101%, but on a buy-out basis, it was deficient by 25%, hence the difference in the valuation and difference of comprehension on that point. That also answers the question from the hon. Member for Kilmarnock and Loudoun (Alan Brown).
It is accepted entirely that this is a very complex area in which there is no quick fix; no solution is pain free. It is only right that any changes should be carefully thought through, proportionate and justified. The Green Paper explored many of the issues facing defined benefit schemes. In particular, consolidation could provide a long-term solution for schemes currently unable to afford a full buy-out. Further work is being done on this, and it would not be right to pre-empt the outcome, but the White Paper will be delivered in the fullness of time, relatively shortly.
I appreciate the fact that the Minister says the White Paper will come shortly. Will he say how soon and what the timescale will be for legislation after that? That is the important thing. Also, I am bringing forward a 10-minute rule Bill on this issue, and I would be happy to work with the Government on aspects of it, if he is willing to do that.
The hon. Gentleman asked me three questions. I will write to him with a bit more detail, because the time available to me is limited. The White Paper will be delivered at some stage this spring. Spring is an elastic term in the House of Commons, as he will understand, but it will certainly be delivered before the summer period. I look forward to his ten-minute rule Bill.
To be fair to my hon. Friend the Member for Angus, she has set out a number of positive solutions, some of which we have been able to take forward. I am aware that there is an all-party parliamentary group and I am happy to meet the group to discuss the matter in more detail. I will certainly write to individual colleagues with more detail on what we have discussed today.
I congratulate my hon. Friend on bringing a very important matter to the House. I want to make it absolutely clear that we accept that this is a complex but very upsetting situation for many of our constituents. We have all had individuals attend upon us with a file of papers and say, “Please help me sort this out.” I appreciate that problem and welcome the fact that she has taken the time to bring her constituents’ concerns to the House. I hope that I have provided some comfort about what we are doing now, some aspiration about what is coming in April and the opportunity to address the problems raised by individual constituents, because we take this matter very seriously.
Question put and agreed to.
Motion made, and Question proposed, That this House do now adjourn.—(David Rutley.)