We are interested in your views about extending the employer “lock-in” rule, which is in place until 31 December 2019. While this rule is in place it prevents employers from ceasing to be a participating employer of the Plumbing & Mechanical Services (UK) Industry Scheme (the “Scheme”) without Trustee consent.
The Scheme is a last-man standing pension scheme, which means employers are collectively responsible for funding the Scheme. The Scheme is best protected by having as many employers as possible supporting and standing behind it.
It is our responsibility to highlight to you as an employer that running a pension scheme is not risk-free. There is a risk that the Scheme’s investments do not perform as well as expected or that members live longer than the actuary has assumed. If a funding gap arises, participating employers could be asked to pay more money into the Scheme to fill the gap. Although this has been the law for many years, the Trustee has never needed to ask employers to make extra contributions.
The Scheme has a wide variety of participating employers across the UK from small family businesses to large national businesses. The Trustee takes into account the strength of the employer “covenant” when making decisions about the Scheme. All the participating employers have a legal duty to support the Scheme financially, but the Scheme relies mostly on the Scheme’s larger employers, which have more assets and generally have a large share of pension liabilities.
The Trustee has asked the three Constituent Organisations (APHC, SNIPEF and Unite the Union) to change the lock-in rule so that it is reviewed once a year and stays in place until it is no longer needed. The Trustee understands that employers want more certainty about the Scheme’s future and the lock-in rule helps to provide this.
The Trustee relies on the investment strategy to build up reserves without asking employers for financial support. These reserves help the Scheme withstand unexpected shocks. Once the Scheme reaches a “safe” limit which could at least 10 years, the Scheme would be much less reliant on employers and the lock-in rule could end.
Investment and life expectancy are the two main risks that could have the greatest financial impact to the Scheme’s finances. The Actuary has said they could worsen the Scheme’s funding position by around £150m in a bad year. It is worth noting that due to Brexit uncertainty and a global slowdown over the last few months the Scheme’s funding position has deteriorated by around £100m, showing that these risks are real. The actual time it takes to build up a buffer is difficult to predict because it depends on how the Scheme’s investments perform.
If the lock-in rule is not extended beyond 31 December 2019, employers will be able to end their participation in the Scheme by giving the Trustee notice from 1 January 2020 and paying a ‘section 75 employer debt’. If employers leave the Scheme because the lock-in rule is not in place and the Scheme suffers an unexpected shock, the burden of financially supporting the Scheme could fall on the employers least able to afford it which is a scenario we want to avoid.
Therefore, the Trustee believes the employer lock-in rule is needed because it helps to protect member benefits and it shields individual employers against the actions of other employers, which is important in a last-man standing pension scheme.