Plumbing Pensions to use member funds to fight section 75 claims

Trustees of the £2bn Plumbing & Mechanical Services (UK) Industry Pension Scheme applied to the courts in March 2020 for the right to use plan assets to fund legal battles, having been challenged over its decision to pursue section 75 debt despite admitting errors in its handling of orphan liabilities, which included inadequate communication with, and poor advice being given to, employers.

One such employer faced an exit fee of £851,000 after being told that, in the event of a management buyout, section 75 debt would not be payable. Another company, Kamco, sought £265,000 in damages from Plumbing Pensions — the scheme’s trustee — in July 2021, alleging it had continued to promote the scheme to prospective employers despite being aware of the mounting problems around section 75 debt.

Section 75 of the 1995 Pensions Act stipulates that employers in multi-employer schemes become liable for debt when they leave the scheme or cease trading. However, should they fail to pay, the debt becomes an orphan liability, which the scheme’s remaining employers must pick up.

This court decision brings to an end a long period of uncertainty and allows the trustee to move forward and deal with any litigation that arises

Jon Bridger, Plumbing Pensions

As of July last year, the plumbing scheme had around 350 employers remaining out of 4,000 that had been through the plan since its inception. The remaining employers, many of them small businesses, have been saddled with orphan liabilities amounting to more than £1.6bn, threatening unincorporated business owners in particular with bankruptcy, and even the prospect of losing their homes.

The scheme only began pursuing the debt in 2019, despite regulations requiring it to do so from 2005, leading to harsh criticism not only of Plumbing Pensions, but also the regulators and the legislation around orphan liabilities.

Plumbing Pensions blamed outdated administration systems, saying it had not been possible to begin pursuing the debt before 2019. It has since begun a comprehensive overhaul of its governance.

It applied to the courts for permission to use members’ funds to fight its legal battles, as the trustee company has no funds of its own. It requested clarification from the court as to whether it benefited from indemnity under the scheme rules. The Court of Session has now granted it permission to use members’ funds, having initially shown reluctance.

However, in the time it has taken for the court to reach its decision, the orphan liabilities of several plumbing businesses have increased significantly. Pensions Expert is aware of one such company that saw its estimate almost double over the course of a year.

The question of indemnity

The Plumbing Pensions petition drew responses from a number of interested parties, including Kamco, the engineering services group NG Bailey, and the Plumbing Employers Action Group.

The latter raised concerns about the way Plumbing Pensions’ poor governance structure and apparent failure to comply with the law, while NG Bailey, an employer member of the scheme since 2001, argued that the scheme’s trustee had breached its fiduciary duties by failing to seek payment of section 75 debts, which would rule out the prospect of it being granted indemnity by the court.

However, both parties subsequently withdrew. Kamco, meanwhile, filed a suit against Alan Pickering, former chair of Plumbing Pensions, demanding that he and the trustee company pay back any amount it was forced to pay by way of section 75 liabilities, thought at the time to be around £260,000.

Kamco argued that Plumbing Pensions had encouraged it to join the scheme without informing it of the problems it was having around section 75 debt, which the employer alleged was a wilful failure on the part of Plumbing Pensions.

In his discussion of the case, the court’s reporter, Lord Drummond Young, explained that the scheme’s rules stipulated that indemnity was only forfeit in the event of wilful wrongdoing, or breaches or trust “that are knowingly and wilfully committed”, while Scots law would likewise disqualify any claim to indemnity in the event of gross negligence.

“The essential feature of gross negligence is that it involves a failure to engage with the basic duties of trusteeship, for example, through a persistent and serious lack of attention to the affairs of trust or persistent and serious mismanagement of its affairs or assets,” he explained.

Failings did not amount to gross negligence

In detailing the facts of the case, the court recognised that, with the exception of Pickering, “those now in charge had no connection with the scheme until about 2005”.

It also noted Plumbing Pensions’ acknowledgement of various failings and its commitment to governance reform.

When legislation in 2005 changed scheme funding bases from a minimum funding requirement basis — under which the scheme was well-funded — to a buyout basis, this posed problems as it meant section 75 calculations could no longer be deemed unnecessary because the scheme was in surplus.

The scheme’s actuarial advisers expressed concern at the time that its records would not enable it to properly calculate the section 75 debt of its employer members. Plumbing Pensions responded by lobbying the government to change the rules to exempt it from the new legislative requirements, but it was unsuccessful.

Part of the reason for the long delay in pursuing the debt was that extensive work had to be done on its administrative systems in order to begin the process. 

According to the court’s summary: “The data was there all along but it took time for the petitioner to learn: (i) that it existed at all; (ii) that it could be extracted from the system; and (iii) that a major rejig of the system was going to be needed in order to do that.”

However, Drummond concluded that throughout this process, and despite Plumbing Pensions admitting that its governance was “defective”, there was “no arguable basis for stating that the trustee, or its officers, have ever acted in bad faith, and that there is no suggestion of fraud or dishonesty”.

The court likewise found that its admitted errors did not constitute gross negligence, nor did they “come near” to it, and they did not amount to “an abdication of its fundamental responsibilities as a trustee”.

It was, therefore, entitled to rely on the indemnity specified in the scheme rules.

“Those now involved with the scheme have done their best to ensure that it has been properly administered in a manner consistent with the relevant legislation, and in doing so they have displayed proper standards of care and diligence in administering the scheme’s affairs,” the court’s summary stated. 

“The section 75 debt issue was just one relatively small part of the scheme’s administration during the relevant period. There was no significant criticism of the remainder of the petitioner’s administration of the scheme, which generally continued to function as normal.

“The great majority of the trustee’s duties in relation to the scheme were fulfilled; it was merely one very difficult aspect which provided grounds for criticism.”

PEAG has been approached for comment, and Kamco declined to comment at this time.

Jon Bridger, trustee chair at Plumbing Pensions, told Pensions Expert: “Section 75 employer debt legislation has been difficult for many multi-employer pension schemes to manage and the plumbing scheme is no exception. 

“This court decision brings to an end a long period of uncertainty and allows the trustee to move forward and deal with any litigation that arises. We will continue to support employers if they have any concerns about section 75 debts or if they would like to discuss any of the legal easements that might be available to them.”