WHEN Kate Yates became chief executive of the plumbing industry’s £2 billion, 35,000-member pension scheme in 2016, she knew there was a chance she would have to chase some of the employers paying into it for potentially enormous sums of cash.

Though the multi-employer Plumbing & Mechanical Services (UK) Industry Pension Scheme, which is known as Plumbing Pensions, had been lobbying for an exemption from employer-debt laws that came into effect in 2005, it was beginning to look like it would be unsuccessful. When the Department for Work & Pensions (DWP) confirmed that to be the case in March 2018, the scheme had no option but to comply.

However, as many of the 4,000 employers that have used the scheme over the years have been sole traders or small partnerships, the sums some are being asked to pay, which vary in size from a few hundred thousand pounds to several million, are unmanageable. As reported in The Herald yesterday, retired Inverness businessman Murray Menzies fears he and his wife are facing financial ruin and homelessness because he has been issued with a £1.2 million bill.

READ MORE: Retired plumber fears financial ruin over £1.2m pension scheme debt

Ms Yates said she recognises that for many people the bills have come as a shock and that the sums being asked for are “big and scary and unaffordable”, but added that unless there is a change to the law the pension scheme has no option but to try to recover them.

“I can see why the law was brought in - it was after a particular case where a large international shipping company was able to walk away from its UK pension liabilities,” she said. “But where somebody has personal savings, a house or an asset, the law can never have intended those personal assets to be at risk because of an occupational pension scheme.”

As things stand, all defined benefit pension schemes are required to collect so-called Section 75 debts from employers they cease to have an association with, the aim being to ensure there is enough money in the pot to pay all future liabilities when companies go bust.

The problem with multi-employer schemes like Plumbing Pensions is that anything from the departure of a company’s final employee to the retirement of its owner will trigger a debt, which then appears unreasonably large because it must be calculated on a buy-out basis.

Ms Yates noted that the bills being issued to Plumbing Pensions employers are even further inflated because it is a last-man standing scheme, meaning existing employers must pay to cover the obligations of those that have already left. This is a significant issue because for a brief period between 2007 and 2009, when legislation allowed it, some employers were able to leave the scheme for as little as £1 while their employees pensions have continued to grow.

READ MORE: Plumbers asked to pay potentially ruinous pension debts

“The figures are huge because they are calculated on a buy-out basis, which is very expensive,” she said. “On an ongoing basis we aren’t required to fund to that level, and the scheme is well funded on an ongoing basis.

“Orphan liabilities more than double the debt that people have to pay because they have to pay for all the employers that left before and didn’t pay a debt.

“This is a last-man standing scheme, but why should someone pick up the tab for someone else who was able to leave for £1 when the law was different?

“When the legislation first changed [in 2005] there was a disbelief that it could apply to a scheme like this because of its history and the number of employers who have been in it; the number of orphan liabilities on day one was staggeringly huge.”

The scheme, which closed to further accruals in the summer, is seeking to address the ongoing impact of orphan liabilities by asking all existing employers to agree to a lock-in, something a handful of very large employers that use the scheme and can afford to pay to exit it have been reticent about.

There are also certain easements, such as flexible-apportionment and deferred-debt arrangements, that employers can use to legally put their debts to one side for the time being. Yet while those easements only solve the problem for employers on a temporary basis, there is a small group of employers, including Mr Menzies, that cannot access them in the first place.

“Many employers have chosen to use one of the legal easements, which means they don’t have to pay a debt because it transfers it to another legal entity,” Ms Yates said.

“It pushes the can down the road, but we would hope that employers never have to pay this money. The scheme is well funded on an ongoing basis and we want to protect that but we also want to gradually improve the funding situation to the point where we can buy annuities for all the members, at which point there would be no debt.

READ MORE: Plumbers group hits out at handling of potentially ruinous pension fund debts

“If we can get to full funding on that basis employers could leave the scheme and it would trigger a debt but that debt would be zero.

“The group that most worries me is unincorporated employers who are retired - there’s very little they can do because there are no easements that can easily help them.

“We’ve taken Murray Menzies’ case and others like it to the pensions minister and the DWP, we’ve made the Work and Pensions Select Committee aware of it and we’ve told the Pensions Regulator.

“We are trying to do everything we possibly can but we are in a tricky position because the advice we are given is that we must issue these formal debt notices because the law says we have to.”