UK: What Does BHS Mean For The Future Of Pension Scheme Regulation?

Last Updated: 1 August 2016
Article by Mark Howard
Most Read Contributor in UK, September 2017

Leaving to one side the headline grabbing libel cases, possible knighthood stripping and death threats, what does the joint report of the Work and Pensions and Business, Innovation and Skills Select Committees mean for the future of regulation defined benefit pensions schemes?

The Committees' report is focused on the events leading up to the sale of BHS in 2015 and its subsequent demise in 2016.  It is, in passing, critical of the Pensions Regulator (tPR) describing it as "reactive" and "slow-moving" and that it could "...have shown more urgency in engaging with BHS and the pension scheme trustees".  But the last paragraph highlights that the Work and Pensions Committee will be moving on to consider pensions law more widely:

"The future of occupational pension schemes is perhaps the greatest challenge facing longstanding British businesses. In an environment of rising longevity, interest rates close to zero and intense international competition, defined benefit pension liabilities accumulated in a different age can appear burdensome and unaffordable. It should not be forgotten that these liabilities are promises of deferred pay to employees. It is imperative that the regulatory framework does not allow sponsor companies to evade those responsibilities and, in doing so, pass the burden onto other schemes that pay the PPF levy. There may be a case for stronger and more proactive regulation. It is equally important, however, that a balance is found to enable otherwise viable companies to continue to operate. The jobs of those currently in employment are inevitably in some competition with the pension entitlements of their forebears. Investigating how to secure a fair and sustainable settlement will be at the centre of the Work and Pensions Committee's ongoing inquiry."

With that in mind, TPR 's written evidence to the Select Committees makes interesting reading as TPR identified a number of areas where pensions law might be changed:

  • A more flexible information gathering power, along with a general duty to cooperate with tPR, including the ability to compel parties to submit to an interview.This would be similar to the powers given to investigators under the Financial Services and Markets Act 2000 and would build on the already broadly framed powers under section 72 Pensions Act 2004 to require parties to produce documents and information.
  • Requiring tPR to be involved in M&A deals where there is significant underfunding and/or the transaction puts the security of the scheme at risk.Lady Barbara Judge, until recently the Chair of the Pensions Protection Fund, has also backed the idea of the Regulator being given a veto over M&A deals.This proposal would require careful consideration as to where the line for tPR's involvement is drawn.
  • A greater supervisory role for funding valuations; perhaps with tPR approving or setting limits to recovery plans for high risk schemes and ensuring the scheme is being treated fairly by the employer. At present tPR's powers over scheme funding are framed to apply only when there is a failure to comply with the legislation.Although TPR has threatened to use its powers, it has not done so to date.
  • A more risk-based and segmented approach to scheme valuations.With more regular monitoring and supply of information to tPR for higher risk schemes, while reducing burden for well-run/funded schemes. Additionally, with the developments in technology, the 15 month timeframe for completing a valuation should be shortened.
  • Extending the requirement for a Chair of Trustees statement to defined benefit schemes and public service pension schemes to improve governance.
  • Consolidation of smaller schemes, which are not in a position to benefit from economies of scale and are less able to adopt best practices set out by our guidance.This suggestion is also made in the Pensions Regulator's recent discussion paper on "21st Century Trusteeship and Governance".

These proposals – not least the increased powers in connection with M&A deals – would bring a serious resourcing issue for the Pensions Regulator, which it acknowledges.  But there is already perhaps some indication that the Work and Pensions Committee would be supportive as it considered that the Pensions Regulator " will increasingly be called upon to make decisions crucial for thousands of employees and pensioners in a fast-moving and uncertain environment. It is essential that it has the powers, resources, leadership and commercial acumen to act decisively.

The reference to "otherwise viable companies" in the final comments of the Select Committees' report, also raises the question of the overall sustainability of defined benefit pension schemes. At the end of 2015, the Pensions Policy Institute published a report on the sustainability of pensions: The Greatest Good for the Greatest Number.  The key conclusions were that around 1in 6 defined benefit pension schemes were "stressed" and unlikely to ever pay their full benefits, but that earlier intervention might lead to more positive outcomes.  The Work & Pensions Select Committee's investigation is going to have to grapple with this issue as part of its investigation. 

Of course, even if changes are recommended, the Government would have to agree to the Parliamentary time to implement any new legislation.  However, in just over 20 years, we have had the Pensions Acts 1995, 2004, 2007, 2008, 2011 and 2014, the Welfare Reform and Pensions Act 1999, the Pension Schemes Act 2013 plus the major tax changes of A-Day in the Finance Act 2004 (and with further changes annually).  An ageing population also means that pensions is politically more important.  So who would bet against more changes?

Please click here to read an article on libel cases.

Please click here to read an article on a possible knighthood stripping.

Please click here to read an article where the BHS CEO claims he was threatened by the ex-owner of BHS.

Please click here to read the joint report of the Work and Pensions and Business, Innovation and Skills Select Committees.

To view the original article please click here.

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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