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    From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    BHS Pension Scheme

    BHS Pension Scheme

    3 November 2016

    COME ON SIR PHILIP, JUST KEEP TO YOUR WORD AND PAY UP WHAT IS NEEDED

    • Pensions Regulator is right to pursue BHS owners on behalf of pension members
    • You don’t tell the Regulator what you think is the right amount, the Regulator tells you!

    Two important BHS questions have not been answered:

    1. Why did Sir Philip not get Clearance before selling BHS?
    2. How did both he and Dominic Chappell believe the half billion pound pension debt was going to be met?

    I am pleased to see the Pensions Regulator pursuing the former owners of BHS on behalf of the Pension Scheme members.  If the Regulator believes that the pension scheme was not adequately supported, then it must go after those responsible to recover more money.

    They should have obtained Clearance before the BHS sale and should have had a proper plan for fixing the deficit:  There are two vital questions that lie at the heart of this sorry saga.  Firstly, why did Sir Philip not get Clearance from the Pensions Regulator before selling BHS?  Secondly, how did he and Dominic Chappell believe the company was going to pay more than half a billion pounds of pension debt to cover BHS workers’ pensions?

    If Sir Philip had obtained Clearance, he could have avoided these problems:  We have an established process for companies that want to sell businesses with large pension deficits.  You go to the Regulator, you will be asked to provide information and evidence to show the funding of the pension scheme and how you have supported it in the past, and then the Regulator will assess the situation and tell you how much you need to pay in order to meet your responsibilities.  Sir Philip originally applied for this Clearance but never went through with the process.  It is not clear why.  Did he not want to provide all the information asked of him?  If so, he has now had to provide it anyway.  Did he decide to just take a gamble and hope he could avoid further payments?  If that was the case, he lost and should now pay up.  In any case, it would be entirely wrong to try to avoid proper responsibility for the pension promises made to BHS workers.

    You don’t tell Regulators what you believe is the right amount – they tell you! When I was Pensions Minister, he approached me to try to help him with his pension problems.  I refused.  He did not seem to understand how the Regulatory system works.  The impression I had was that he believed it was up to him to tell the Pensions Regulator how much he was willing to pay, rather than him asking the Regulator to let him know what was the right amount.  It seemed he may have believed she was being unreasonable but it is simply not up to him to decide this.  The Regulator is the body established to protect our pension system and ensure employers cannot just walk away from their pension obligations.

    If he had obtained Clearance it could have cost far less than he will now have to pay:  This established mechanism of obtaining Clearance before selling a company with a large pension deficit has been used by many businesses in the past.  It allows the Regulator to investigate the pension situation before the business is sold, assess how the owner has supported it up till now, and then decide how much more, if anything, needs to be paid in for the owner to have met its reasonable responsibilities.  But in order to do this, the Regulator demands financial information about the past history of the business.

    There seems to have been no serious planning by the owners of BHS for fixing the pension deficit properly:  The second vital question that remains a mystery is how on earth Sir Philip and Dominic Chappell actually believed this company, with more than half a billion pounds worth of pension deficit, could meet those liabilities.  Where was the money going to come from?  The workers of BHS had worked loyally for Sir Philip for years, had trusted his pension promises and were relying on him – and any new owner- to ensure their pensions would be paid.  Sadly, the owners do not seem to have taken these obligations as seriously as the workers and the Regulator would expect.

    The BHS sale documents say the business was being sold ‘debt free’.  Does this suggest the owners somehow believed pension debt is not real? When the Work and Pensions Select Committee investigated the BHS pension situation, it uncovered documents that described the sale of the business for £1 as being ‘debt free’.  It was as if the hundreds of millions of pounds of pension debt somehow didn’t count!  It is now clear that this debt is real and the Regulator is right to ensure that both BHS owners and all other sponsors of company pension schemes understand that they cannot just walk away from pension promises.  They have to co-operate with the Pensions Regulator and then pay what is considered a fair sum into the scheme.

    Sir Philip said he would ‘sort’ the pension situation – he now needs to put up enough money to do so:   I do believe that Sir Philip meant what he said to the Work and Pensions Select Committee and that he wants to deal with the pension debt.  However, this is going to cost him a significant sum – and will be likely to cost far more than if he had obtained Clearance in the first place before he sold BHS.  He knows that if he just puts in a small sum, the money will not improve the pensions of his former workers.  He has to put in enough money to satisfy the Pensions Regulator that the scheme can pay more than PPF benefits.

     

    Paying more than PPF benefits will cost hundreds of millions – but paying less than this will mean members stay in the PPF and the money just goes to the PPF pot:  If I were Sir Philip, I would take back responsibility for the BHS scheme and manage it on an ongoing basis to find the best way to meet the liabilities over time.  But that will be expensive.  This is what he promised Parliament he would do.  Putting in a smaller amount than the Regulator requires will just mean members stay in the PPF and any extra money goes into the central PPF pot.  To pay better benefits will require a bigger amount of money, but it is up to the Regulator to decide what that amount should be.

    Get Real Sir Philip – you should have obtained Clearance and, having not done so, you have ended up with a full-blown Regulatory inquiry and huge reputational damage.  The Regulator will now tell you how much you have to pay – it is not up to you, just get on with it.

    NOTES

    This document was released by the Work and Pensions Select Committee and suggests the BHS pension scheme seems not to have been considered a ‘debt’ in the negotiations to sell the business.  This document skirts over the pension issue as if it hardly exists.

    http://www.parliament.uk/documents/commons-committees/work-and-pensions/Correspondence/Points-of-Principle-16022015.pdf

    The sale of the business is called ‘debt free’ even though it actually had a £500m debt owed to the pension scheme, i.e. staff, former staff and pensioners!  For example, Para 4. states Arcadia Group will ‘deliver the BHS Group on a debt free basis’.  Para 13 also says ‘BHS will be debt free on completion’ – again suggesting pension debt is not considered real debt.

    The document merely suggests that this could be taken care of with the help of Arcadia paying £5m a year to the trustees.  Para 7 states that Arcadia Group will make annual contributions ‘for each of the next three years’ of £5m pa to the pension scheme.  The three year period is intriguing.  What provision was made for meeting the balance of half a billion pounds of liabilities to the pension scheme members?

    Indeed, even this £5m a year contribution is caveated in Para 8. which interestingly mentions that Arcadia would not even put that money in if the new owners make an agreement with the trustees that could reduce liabilities.  It requires the new owner to ‘use its reasonable endeavours to reach a settlement, as soon as reasonably practicable, with the pension scheme trustees … following a favourable change in interest rates for instance.’  This suggests Arcadia believed rising interest rates would allow all to be resolved.

    There is an intriguing bullet point in Para 16 too.  The final point is that there will be agreement from the pension trustees.  It says that completion of the deal will be conditional on Arcadia and the purchaser ‘receiving any benefit of any tax or pensions clearances that they feel are necessary prior to completion’ but in the end they did not get Clearance for the pension scheme.  Did they consider it was not necessary before completion?  If that is the case, why?


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