UK: Protecting Pensions

Last Updated: 22 July 2016
Article by ICSA  

The current pensions regulatory structure is vulnerable

On 2 June 2016, the administrator Duff & Phelps announced that attempts to save BHS as a going concern had failed. All 164 stores are planning to close with the loss of 11,000 jobs. It is the most significant corporate failure in the UK's retail sector since the collapse of Woolworths in 2008. The brand that had been present on the nation's high streets since 1927 will now disappear, although more recently the company's 70 overseas stores have found a buyer in Qatari group, Al Mana.

There are a number of factors that make the failure of BHS particularly noteworthy. Central to discussions is the role of former owners Sir Philip Green's Arcadia Group and Dominic Chappell, and BHS's defined benefit (DB) pension scheme, which has been left with a deficit of £571 million.

Insolvency event

When BHS proposed a Company Voluntary Agreement in March, it triggered an 'insolvency event' − the first stage in having its pension scheme's liabilities taken over by the Pension Protection Fund (PPF).

As the employer's business will not now be transferred to another employer, and the scheme's assets are not adequate to permit a full buy-out of all existing liabilities, responsibility for paying existing and future liabilities will now be transferred to the PPF.

For members, the implications for the security of their benefits will vary. Those who are already receiving pension payments and who are over the scheme's normal pension age will generally continue to be paid their pensions in full, although annual inflation-linked increases will only be paid in respect of benefits accrued since 1997.

However, for those who have yet to retire or who have retired early, restrictions can apply. In such cases, 90% of accrued benefits will be payable, subject to an overall annual cap set at £33,678.38. Again, inflation-linked indexation will only apply to those benefits that have accrued since 1997.

Although absorbing the liabilities of the BHS scheme will have a significant impact on the PPF, it will not affect its viability. The PPF has assets in excess of £20 billion, which represents 115% of the funds required to meet existing liabilities. BHS would represent the sixth or seventh largest deficit to be addressed by the PPF. However, the extent to which the PPF would absorb the current deficit remains unclear.

Statutory responsibility

Under the provisions of the 2004 Pensions Act, the Pensions Regulator (tPR) has a statutory responsibility to protect the PPF by ensuring that it seeks to recover assets owed to schemes following the sponsor's insolvency. This will minimise the ultimate financial impact on the PPF.

A good example of this responsibility concerns the case of Ilford Imaging Limited, which went into administration in 2004.

The scheme's trustees sought to secure benefits in full for the company's senior management through the purchase of annuities. This depleted the resources of an already underfunded scheme on the understanding that the PPF would absorb the cost of the greater deficit.

This attempt to 'game' the PPF was successfully challenged by tPR with the result that Ilford's managers' pensions were reduced and the deficit inherited by the PPF significantly reduced. TPR may continue to pursue Sir Philip Green with a view to him making additional contributions to the BHS scheme.

When Sir Philip bought BHS in May 2000, the scheme was actually in surplus. Over the past 16 years, there have been a number of factors which have badly affected the funding position of DB schemes – the fall-out from the 2008 crash being but one. Yet what has caused particular concern is the extent to which the Green family profited from the company during their period of ownership.

Between 2002 and 2004, BHS shareholders (principally the Green family) were paid more than £422 million in dividends. A company controlled by Sir Philip Green made nearly £10 million in interest from a £19.5 million bond issued to BHS in May 2000. Additionally, Sir Philip collected £151.4 million in rent paid by 12 BHS stores.

However, over the same period, the pension scheme's surplus gave way to an expanding deficit. By 2009, the deficit stood at just under £138 million. BHS agreed to make additional contributions of £2.5 million per year to make good the deficit. By 2012, company contributions had been increased to £7.5 million per year. Controversially, however, this was contingent on the scheme's trustees agreeing to a 'recovery plan' – the period over which a deficit is to be made good – of 23 years.

Many pension industry figures are surprised that the trustees should have agreed to such a long recovery plan and that tPR – which has ultimate supervisory responsibility for DB pension schemes – permitted it. However, given the sums of money being extracted from the company at the time, it is reasonable to suppose that there was little scope for the company to make significantly larger pension contributions.

Meanwhile, Sir Philip sold the BHS Group for just £1 in 2015. The purchaser was a company called Retail Acquisitions, headed by a 49-year-old former racing driver named Dominic Chappell.

Chappell had no previous experience of the retail sector prior to taking over BHS. During his brief period of ownership, Chappell was reportedly paid a salary of £540,000.

Better financial support

When a distressed company changes hands, clearance is required from tPR to ensure that pension liabilities are properly addressed. However, Lesley Titcomb, tPR's Chief Executive, advised the Work and Pensions Select Committee that she had only learned of the sale of BHS 'through the newspapers' – although Arcadia's company secretary has written to the joint Business, Innovation and Skills and Work and Pensions select committees to say she was given advance notice.

It is against this background that tPR is seeking to secure better financial support for the BHS scheme than has been offered to date. Sir Philip's existing offer of support for the scheme consists of £40 million in cash plus a secured loan of a further £40 million. It is unlikely that tPR will settle for this and its 'anti-avoidance' investigation will seek far more from the Green family.

No settlement is in sight at the time of writing, but some commentators have suggested that the regulator will require Sir Philip and his family to make a contribution to the scheme of up to £280 million.

Nearly 20 years have elapsed since the enactment of the 1995 Pensions Act. This statute was introduced partly as a result of the scandal that followed Robert Maxwell's and the Mirror Group pension schemes.

It is clear that current regulatory structures are vulnerable and members' benefits could be at risk. It seems inevitable that fresh legislation will be introduced to provide better protection for accrued pension rights. Ultimately, the problem that needs to be addressed is cultural.

The term 'unacceptable face of capitalism' was coined by Sir Edward Heath to describe Tiny Rowland; recently, Tory MP Richard Fuller used it to describe Sir Philip Green. Improved regulation can achieve only so much; it would be naïve to suppose that the situation at BHS could not happen again.

Tim Middleton is Technical Consultant at the Pensions Management Institute

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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