Plumbers’ scheme braced for legal battles over employer debts

Several employers have written letters of complaint to the scheme over its handling of Section 75 employer exit debts, which the scheme only began collecting in 2019 despite regulations requiring collection since 2005.

The debts, which ask employers to provide the full buyout cost of their liabilities, have in many cases threatened to financially ruin smaller employers.

“One employer has already raised proceedings against the petitioner, seeking declarator that no Section 75 debt is due,” the court document read.

It continued: “From communications received thus far from certain other employers, the petitioner considers it likely that some employers will seek to challenge their liability to pay the sums demanded from them… an action group of employers who are contemplating such actions has already been formed.”

According to the scheme, the employer that has already begun court proceedings has agreed to wait until the outcome of the petition is known before continuing.

There’s an issue about how long you can leave debt uncollected. As far as I’m aware, there’s never been a case on that in relation to the Section 75 debt

Michael Calvert, Fieldfisher

According to the documents, the trustees expect that actions may be based on allegations of incorrect advice given to them by the scheme.

While the trustee board is protected from most liabilities by an insurance policy, this specifically excludes claims arising from its handling of Section 75.

As such, the trustee company, which has no funds of its own, has had to seek to use the scheme’s assets, potentially creating a further drain on funding. The petition also suggests that anyone challenging it should be liable for the scheme’s legal costs.

In a statement, Kate Yates, chief executive of Plumbing Pensions, said: “Section 75 employer debt legislation is complicated.  The trustee is doing the responsible thing by checking whether it can continue to use scheme funds to deal with Section 75 employer debt matters.”

A further statement from the scheme said asking challengers of the petition was not an attempt to stymie disagreement: "This is a standard provision in litigation proceedings, and is intended to protect the Trustee and the Scheme. It’s purpose is to make sure that anyone who wishes to become involved in the proceedings is aware that if they lodge answers they will be liable for the costs which they incur in doing so, and may also become liable for the costs of the Trustee in responding to them. Ultimately the issue of costs will be a matter for the court to decide when it reaches its conclusions on the petition."

Trustee admits errors

Although the petition only seeks permission to use scheme assets to defend legal actions, it includes many of the facts to be presented in the ensuing court battles.

The petition argues that the trustee company had been engaging with government and regulators since 2004 via scheme manager Robert Burgon.

A former chief executive of the Scottish and Northern Ireland Plumbing Employers’ Federation and chair of the World Plumbing Council picked as a spokesperson for his expertise, Mr Burgon has since retired.

However, the petition also acknowledges errors made by the trustees, including wrongly advising one employer that in the event of a management buyout a Section 75 debt would not be payable. The exit fee for that employer now stands at £851,000.

Trustees also failed to inform employers that they needed to give formal notice to obtain a “period of grace” — where employers could temporarily leave and re-enrole — giving rise to more than £2.5m of employer debts.

The scheme assured some sole traders that they would not face consequences if they incorporated their businesses, when in fact Section 75 debts became due. In aggregate, these errors meant the scheme found it had temporarily forgone employer debts nearing £10m.

Admin system complicated calculations

The scheme’s trustees were aware of the need to seek Section 75 payments from employers as early as 2005, when the basis for their calculation changed from the level set by the minimum funding regime to full buyout pricing.

Previously, employers had triggered no debt upon leaving due to the scheme’s relatively healthy funding. But with the move to a higher standard, exiting employers began to become liable for debts to the scheme.

Scheme apportionment arrangements were envisaged to help the scheme share out any orphan liabilities — those left in the scheme that an exiting employer has been unable to pay — but a 2008 regulation amendment requiring the written consent of all the remaining participating employers made this impractical for the trustee to effect, according to the petition.

In addition, the scheme’s “member-centric” administration system was incapable of grouping liabilities by specific employers — a key step in calculating exit debts. Some data was assumed not to exist at all.

A solution to this administrative shortcoming was found in 2014, but required “substantial manipulation and the creation of bespoke software”. Further advice was also sought by the trustees, in addition to consultation with employers.

Section 75 letters finally began to be issued in 2019, with debts far outstripping the total value of some employers’ total assets including their houses.

Further claims could appear

According to Michael Calvert, a pensions partner at Fieldfisher, the detail included in the petition is likely intended to assure judges that trustees are not being frivolous and that there is a sensible justification for incurring the costs. However, he agreed that the trustees’ protracted discussions with government and regulators may feature in their justification for delaying collection of Section 75 debts.

“I can see that they might try and argue that — whether that’s an argument that has any substance I wouldn’t like to say,” Mr Calvert said.

“We’re aware that there’s an issue about how long you can leave debt uncollected. As far as I’m aware there’s never been a case on that in relation to the Section 75 debt.”

He said that while the case could prompt further claims in court, the first employer action may act as a test case, establishing principles as to what, if any, remedial action the trustee must take.