A retired plumber from Inverness is facing an eye-watering £1.2m debt over a pension scheme. In 2015, Murray Menzies made the decision to retire and close his business down. The business had started with his dad and had been a longstanding plumbing firm. During its existence, Murray and dad William decided to enrol on a pension scheme for all staff. The Plumbing & Mechanical Services (UK) Industry Pension Scheme ensured employees would continue to receive an income in retirement.
Section 75 debts
When Mr Menzies decided to wind the business up, he was expecting that to be the end of his association with the scheme. However, because of the trigger mechanisms used, there was a problem.
Speaking to press recently, Mr Menzies described the issue:
“Sometimes it was a struggle making the payments because cashflow was always tight, but we trundled on. We normally had about four or five employees. Sometimes the cheque would be £800 to £1,000 a month.”
“I closed down the business in 2015 and I was quite chuffed when I wrote the last pension cheque for the last employee. I thought that was another thing done.”
“Then I got a letter saying I'd triggered a Section 75 debt. My bill is £1,198,300 and there's no way I can pay it.”
This isn’t the first instance of a company triggering a section 75 debt. Earlier this year, another plumbing company was told it had a £400,000 debt. The issue with section 75 debts seems to be that rather than the traditional view of a debt being money owed for outstanding bills, a section 75 debt is created as soon as either:
- An enrolled company becomes insolvent
- An enrolled company stops employing active scheme members
Because of this, the amounts calculated when a company stops trading may feel heavily inflated. The debt supposedly requires enough to meet all future obligations. This can mean companies making £60,000 profits can have £400,000 debts or indeed a local firm owing £1.2m.
Employers in ‘dire straights’
In both cases, despite employers routinely obeying and paying out, the way the fund works has hamstrung them upon ceasing trade. In the case of the £400,000 debt, Chartered Financial planner Mr Cooke of Red Circle Financial Planning blasted the scheme:
“It is absolutely shocking. Before the rules changed, employers were able to walk away, with no debt, paying nothing. A huge number of employers are now in dire straits. Some of the employers getting these notices are sole traders. Technically the trustees can tell them 'I'll have your house then'”
Karen Yates, the scheme’s Chief Executive spoke on both counts regarding the scheme. After the £400,000 debt, she admitted it is "extremely worrying and destressing" when a company gets gets notified. She also concedes the outstanding balances could be “quite significant”.
In a response, she said:
“Hopefully it won't happen, because there are ways to defer the payment of the debt.”
“For a small incorporated family run business, they could become a limited company and transfer the pension liability into the limited company, which gives them some protection, it means their personal wealth isn't at risk.”
For Mr Menzies’ case, Ms Yates advises “We are trying to do everything we possibly can, but we are in a tricky position. The advice we are given is we must issue these formal debt notices because the law says so.”
Section 75 changes needed
While section 75 debts are very different to AYOM’s usual experience, AYOM’s Managing Director gave their opinion on the recent issues.
“The rule changes seem to have made matters worse for employers. They seem to be tied into the scheme even if they wish to call time on their business. While Ms Yates does offer some help for small businesses, it shouldn’t really have to be that way. The scheme seems to operate on members covering liabilities meaning companies will only not see debt letters if the scheme is at full capacity.”
“This seems a somewhat risky format, especially when many members may be sole traders or small businesses. In the case of Mr Menzies, he has gone from being a good employer, ready to unwind and enjoy retirement, to being in an untenable position. £1.2m is a dramatic figure for a local business, especially when he covered all his commitments while being an active employer.”
“Changes may well be needed if cases like these continue to emerge as it puts many people at risk of personal liability because they aren’t aware of the process. It seems Mr Menzies is hoping to head to court and put a common-sense approach on the case. If so, we wish him and all employers in similar positions good luck. We understand the strife businesses go through with liquidity, so those who stick to their payments and wish to bring their scheme to a close amicably, should have the option to do so stress free.”