28 February 2017
- Well done to the Pensions Regulator – £360m deal to support BHS scheme
- Members will get much more than PPF while Sir Philip pays up for future pensions
- Regulator has worked hard to secure good structure for the deal as well as significant extra funding
I am delighted that the Pensions Regulator has managed to agree a deal with Sir Philip Green that secures over £360m for the BHS pension scheme and takes members back out of the Pension Protection Fund assessment. Members should be better off than in the PPF and those with small amounts can choose to take a cash sum up to £18,000 and leave the scheme altogether.
What does this mean for BHS pension scheme? This deal will bring an end to the uncertainty facing so many former BHS employees, who felt let down by their former owners and were worried about losing their pensions. They will now be able to achieve more pension than in the PPF.
So what will happen to the pension scheme members? The members should be better off than if they had stayed in the Pension Protection Fund. Their scheme has been in the ‘PPF Assessment Period’, which means all pensioners and anyone that has reached pension age since the company collapsed will have only been receiving the PPF level of benefits. Under the new scheme, members will be taken out of the PPF Assessment and receive recompense for any underpayments during the past few months and then move onto the higher benefit levels of the new scheme.
What happens to the BHS pension scheme? A new scheme is being set up that will run on outside the Pension Protection Fund, but will remain eligible for it and will still pay an insurance levy to the PPF. The new scheme is expected to be very well funded, now that it will have access to over £360m from Sir Philip Green. The new scheme will be run by three independent trustees, who have yet to be appointed and they will be responsible for its investments and for paying out the pensions to members.
Will all members go into the new scheme then? Most members are likely to transfer to the new scheme. Different categories of member will be in different positions.
- Pensioners are all likely to transfer over to the new scheme, but if they do not do so, they will stay in the PPF and their payments will continue under PPF rules.
- Members who are not yet at pension age are also likely to transfer, and will receive more than under the PPF.
- Members with small pension entitlements under the scheme will be offered a cash transfer if they want it. Those who have pensions with a cash transfer value of up to £18,000, which is likely to reflect a pension income of under £10 a week, will be allowed to take their pension as a cash sum. They will usually be best to transfer into a new Defined Contribution pension scheme and they can use the fund as they wish once they reach age 55, although keeping it for later life is usually most appropriate.
How will those who are thinking of taking the cash sum know what’s best for them? The new scheme has provision for all these members to have access to independent financial advice, to help them assess whether they are better off keeping their money in the new scheme and taking a pension income, or transferring out. For example, if they have plenty of other pension income, they may find the money more useful to them than a small pension, or if they want to pass on money to loved ones or are in poor health, they may feel the cash sum offers them a better option.
How is the new scheme better than the PPF? In the PPF, members who were not yet pensioners would have their initial pensions reduced by around 10% and would lose all their inflation protection for years before 1997. In the new scheme, all members will receive their full pension on day one, and will also receive a fixed inflation uplift of 1.8% a year for entitlements built up before 1997. This is less than the indexation of the old scheme, but much better than the PPF would pay. The PPF would also cap members’ pensions if they were entitled to large pensions.
Will the new scheme still be eligible for the PPF if it fails? Yes, the terms of the deal ensure that the new scheme will still pay a levy to the PPF and will still be eligible to enter it in future if the scheme fails. However, this is not expected to occur as the Regulator believes the extra money being paid to the scheme will leave it very well funded.
How much will the new scheme pay to the PPF each year in levies? The new scheme may be the first one that will be assessed as a ‘stand-alone’ scheme under new calculations being consulted on by the Pension Protection Fund at the moment. The PPF is currently consulting on a new levy methodology to reflect the fact that some schemes have no realistic sponsor but are still running on and managing their investment risks and returns to generate the pension payments required over time.
What happens to the Regulator’s investigations into the BHS former owners? The inquiry into Sir Philip Green and his companies will now end, although there are further investigations into Dominic Chappell and Retail Acquisitions Limited.
Why is this such good news? This really is a good news story. I believe it is good for all concerned.
- The members will get more money than they would have done under the PPF.
- The Pensions Regulator has demonstrated that it has the power to force employers to pay significant extra sums if they failed to fund their schemes adequately.
- It is good news for the PPF because the scheme will now no longer need to be supported by it.
- It is good news for the pensions system because it sends a signal to employers that the Regulator has the power and the determination to pursue employers who underfund their pensions and hopefully it will encourage more employers to obtain Clearance before selling their pension scheme.
- It is good news for Sir Philip Green as he no longer has the Pensions Regulator investigation hanging over him and has now kept his word to the Work and Pensions Select Committee about sorting out the pension.
It is good news for all pension schemes as it can also help to boost confidence in the regulatory system.