From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    A pension scandal ruining good people’s Christmas

    A pension scandal ruining good people’s Christmas

    23 December 2016

    • Major pension scandal destroying people’s lives
    • Family plumbing firms face financial ruin due to flawed pension laws but big firms walk away
    • Good employers, who’ve paid their contributions properly into an industry-wide plumbers pension scheme, face personal bankruptcy by pension rules
    • The law forces them to pay for pensions of thousands of workers who never worked for them – 400 employers saddled with debts for 4000 others
    • Some are on the brink of nervous breakdowns or worse after being let down by our system

    As we approach Christmas, spare a thought for victims of flawed pensions laws.  A pension scandal which has so far failed to gain much attention is ruining good people’s lives.  It involves small plumbing firms who face personal bankruptcy because the law forces them to pay for pensions of people who never worked for them.  Many are family-owned businesses with no limited liability protection and will lose their homes and everything they have.  They are on the brink of nervous breakdown or worse.

    Ruined financially for doing the right thing:  These plumbing industry employers just wanted to offer a decent pension to their handful of employees.  They paid into an industry wide plumbing pension scheme which started in the 1970s.  Some employers have been contributing for their staff for years, always paying what they were asked to pay.  There are now only around 400 employers left in the scheme, but in the past there have been over 4000.  The remaining 400 are suddenly finding, if they need to retire or pass their business on to someone else, they may owe hundreds of thousands of pounds they cannot afford.  This money is demanded by law and they cannot avoid the debts.

    Plumbing industry scheme was fully funded in 2014, but has huge deficit now:  In 2014, the actuarial valuation showed the £1.5billion industry-wide multi-employer scheme was fully funded on the basis of paying pensions as they become due over time.  Since then, interest rates have plunged and annuity costs have soared and, if the scheme needed to buy annuities, it is estimated to have a £1billion deficit.

    Forced to pay cost of annuities for their own employees and thousands of other people who never worked for them:  Once these small employers have no more employees in the scheme, or if they are too ill to manage their business, the law requires them to pay ‘Section 75 debt’.  Under these rules, they must immediately help meet the notional cost of buying annuities for hundreds or thousands of workers who are nothing to do with them, as well as for their own few staff.  These poor plumbers, who are unincorporated firms, family businesses, or partnerships, are required by this flawed legislation to pay for the workers of past employers who have left the scheme or gone bust.

    Like ‘Hotel California’ they can try to check out, but can never leave:  These people are effectively imprisoned by their pension scheme and face bankruptcy, the loss of their homes, their business and their whole life savings if they leave the scheme.  Unlike BHS, these small employers cannot just sell their business to someone else and hope all will be ok.  They cannot even transfer it from father to son.  They cannot retire.  They cannot move their employees to a new pension scheme.  If they do any of these things, they will owe so much money that they face financial ruin.  There is currently no way out for them and their families.  They have been begging the Government to help them but so far nothing has been done.

    Here are just a couple of examples:

    A plumber took over his grandfather’s business and put his two employees into the pension scheme in the 1980s.  He is now 67, needs to retire and wants to pass his business to his son.  But doing either of these things would mean he becomes liable for huge sums he cannot afford.  He would lose his home and be made bankrupt, with nothing to live on in retirement.  He can see no way out.  He is stuck, held hostage by the pension scheme.

    A few years ago, another man took over the plumbing business his father started in 1982.  He now has a young family and, after difficult trading during recent years, he employs just one plumber who is still in the plumbing industry pension scheme.  He would like to close the business but has suddenly discovered that this means the law would require him to pay £1.7m which of course he cannot afford.  More than half of this money relates to pensions for thousands of past employers who are no longer in the scheme).  He says he feels ‘totally destroyed, depressed and worried beyond belief’ and ‘just wants to curl up in a ball and die’.

    What can the Government do?  Ministers must address this scandal quickly.  The Work and Pensions Select Committee has also called for urgent action to address the inadequacies of the current Defined Benefit pension system, but the Government is showing no sense of urgency here.  The legal framework for Defined Benefit pension schemes needs to be adjusted to recognise the unintended consequences of the current system.  As Pensions Minister, I initiated work on this in Summer 2015, but 18 months on and still nothing has happened.  These employers have not tried to walk away, they have not chosen to underfund their scheme, they are innocent victims of flawed legislation.

    Government needs to act swiftly:  In recent months, the Government has issued consultations on Tata Steel and many minor pension matters but has done nothing for the plumbers affected.   I did highlight this problem in my evidence to the Work and Pensions Select Committee (see paragraph 29 of their latest Report http://www.publications.parliament.uk/pa/cm201617/cmselect/cmworpen/55/55.pdf ) and also raised it during the Committee debate on the Pension Schemes Bill in the Lords, but the scandal drags on.

    Section 75 debt rules need to be adjusted – more flexibility for annuity requirement and joint and several liability:  A new approach to employers leaving their multi-employer scheme is needed, with flexibility to accommodate unincorporated or small employers in non-associated multi-employer schemes who have been inadvertently caught out.  The rationale for Section 75 debt was to ensure employers cannot just dump their pension obligations onto the PPF or onto other employers, but the way it is operating in the case of such multi-employer schemes is patently not what was intended.  These employers are not trying to dump their liabilities, but are being forced into bankruptcy by unfair law.  The strict annuity requirements should be relaxed and these small employers should not have to pay for employers who are nothing to do with them.

    ITV’s Joel Hills will be highlighting this injustice at 6.30pm today 23rd December 2016 – I hope it will get good follow up in the New Year too so that the Government will sort this out with the urgency it deserves.

    2 thoughts on “A pension scandal ruining good people’s Christmas

    1. This is a terrible consequence of multi employer affinity pension schemes carrying the burden of poor legislation in the modern business world. It is not dissimilar to the Pensions Trust pension portfolio, occupied in the majority by Charitable and non-profit organisations, which are trapped in the scheme with massive exit debts. If one of the larger charities closes or an organisation goes under, the smaller charities will be taken with them. All because the pension plans, both DB and DC (with guarantees) were designed on the basis of the future funding the past with no thought of exit plans and natural progression.

    2. The same applies for a variety of pensions in the ports industry where I used to work. A small harbour contacted me as I worked for one of the larger ports as they were being held liable for s75 debts of almost £100k when they had two employees in the 60s in the pilots pension for a couple of years. This represented by far their biggest liability and prevented any development occurring as they could not get finance with this hanging over them.

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