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

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    The BHS Pension Scheme – a Q & A

    The BHS Pension Scheme – a Q & A

    25 July 2016

    BHS could have obtained Clearance from Pensions Regulator before selling the company with its massive pension deficit

    Employers must not treat pension liabilities as optional – they have people’s lives attached

    Pensions Regulator has power to force previous owners to pay huge sums

    The Select Committees’ Report on the collapse of BHS makes distressing reading.  The whole sorry saga has highlighted poor practices by many of the parties involved, but we must not forget that it is the loyal workers who are worst affected.  Many of them served BHS for years, working long hours to do their best for the business and have now lost their jobs.

    What has happened to BHS workers’ pensions?  Workers need to know that their pensions have not disappeared.  The Pension Protection Fund is there to ensure that most of their promised pension will be paid.  This insurance is not funded by taxpayers, but by employers sponsoring all other Defined Benefit pension schemes, who pay a levy each year to contribute to this compensation.   Many years ago, when an employer collapsed, workers could lose their entire pension, but those days are now gone.

    What is the Pensions Regulator’s role?  The Pensions Regulator must protect the PPF insurance arrangement from unfair claims and ensure that employers fund their schemes appropriately.  It oversees Defined Benefit pension funds, to make sure trustees and employers are looking after members’ interests and working towards paying the promised pensions.

    Why did the Regulator allow the company to be sold when it had such a large pension deficit?  The Regulator does not have the power to prevent a sale, but it does have the power to force a seller to pay more money into the scheme after the sale, if the employer has not supported the scheme.  Our pensions regulatory system is deliberately designed to allow companies to be sold, rather than standing in the way, since this can often be the best way to safeguard workers’ jobs and the long-term future of the business.

    Can employers just walk away from their pension liabilities when they sell their company then?  Certainly not!  When employers or trustees are facing difficulties, or when an employer wants to sell a business whose pension scheme has a deficit, the regulatory system provides for negotiations that will allow the employer to relinquish its future responsibilities for the scheme.  This is known as the process of ‘Clearance’, whereby the Regulator decides how much the employer should contribute to the pension scheme before it is sold.  Employers have to negotiate with the Regulator in order to work out what support they must offer to the pension scheme, before being able to relinquish responsibility for the pension promises they have made.

    Why wasn’t Clearance obtained before the sale?  It is really puzzling that Clearance was not obtained from the Regulator before BHS was sold.  To grant such Clearance, the Regulator obviously needs to examine all the relevant information showing how the sponsor has supported the pension scheme in the past, what efforts were made to ensure its deficit was dealt with, and whether extra money should be paid in before selling the business on.  This would normally be part of a sale process, when a company has a large pension deficit, yet it seems the information requested was not supplied, so no Clearance was granted.  Without proper evidence, the Regulator cannot assess Clearance.   That means the employer cannot just walk away from any further responsibility for the pension promises, the Regulator will be able to force further contributions.  It is surprising that neither the seller’s nor the buyer’s advisers ensured Clearance was obtained before the sale was completed.  This could have allowed Sir Philip to ensure no further liability.

    How could a business with such a huge pension deficit be sold like this for £1?  The pension debt appears not to have been taken as seriously as it should.  Pension debt is real, yet it seems to have been treated almost as if it did not really exist.  Indeed some of the pre-sale papers actually state that the business was being sold ‘debt-free’.  It is impossible to fathom how a business with a huge pension deficit could be called ‘debt-free’.  It is really important to ensure that other employers recognise they cannot just pretend their pension liabilities can be passed on to a new owner, without further responsibility.

    Who did the buyer or the seller think was going to pay these workers’ pensions?  One cannot help wondering how the former owners and the new owners actually believed the promised pensions would be paid?  How did they believe the business would generate hundreds of millions of pounds to meet the liabilities?  The worry is that the liabilities were somehow not considered to be ‘real’.  But they are – and they also have people’s lives attached to them, so it is vital that sponsoring employers and trustees draw up plans to help meet the liabilities.

    What happens next?  The Pensions Regulator is now investigating the sale of BHS and is gathering all the evidence that it would have requested for a Clearance process.  It is assessing whether the previous owners have further responsibility to put more money into the pension scheme.

    Should the Regulator be able to stop businesses being sold if they have a large deficit?  Corporate deals can often be in the interests of the workforce and improve long-term business prospects.  Ensuring the strength of the employer to provide backing for the scheme in future decades can be as important as today’s estimated funding levels.  Preventing a company from restructuring might not be in the best long-term interests of the business or could force an employer into insolvency, or damagingly weaken its ability to trade.  This will not help the pension scheme.  Therefore, the Pensions Regulator stands ready to help trustees and employers manage their pension liabilities for the long term in a pragmatic and flexible way, but it does rely on employers co-operating and providing the necessary information for Clearance to be granted.  This could have happened with BHS, but it did not.

    Is the Regulator strong enough to hold employers to account?  Yes, the Regulator does have strong powers.  Of course it is also possible that Parliament might want to give it further powers, after the results of its investigations are published.  It is important that pension debt does not stop businesses from operating effectively, and there is a delicate balancing act between allowing employers leeway to invest in their business in the short-term and ensuring they can meet their pension liabilities in the longer-term.  The Regulatory system has worked well so far, but that does not mean there is room for complacency.

    Can the Regulator ensure more money is paid into the scheme?  Yes, if it believes that under the previous owner, the scheme was not adequately funded, the Regulator can require him to pay in extra sums.  In theory, it can require hundreds of millions of pounds to be paid.

    Will members get their pensions quickly?  The Pensions Regulator is conducting its investigation into what happened with BHS and who is responsible for the pension deficit.  For the moment, every member is being looked after in the PPF Assessment Period, all pensioners will continue to receive their pensions and those reaching pension age will start receiving the PPF level of payment, which is around 90% of their promised pension.  Unless significantly more money is found for the scheme, it will remain in the PPF and its deficit will be covered, with members receiving PPF payments in future.

    Will paying in more money mean the workers get better pensions?  Not necessarily.  Just paying in a few tens of millions will not give the workers better pensions.  Any amount less than required to cover PPF benefits will merely go into the PPF and will not give workers better pensions.  Sir Philip has said he intends to fix the problem and gave assurances of this.  I believe he means this and intends to pay more money to support the workers’ pensions.  However, members will only be better off if enough money is set aside to pay out more than the PPF level of pension.  This would likely mean hundreds of millions of pounds.  The problem here is that the assessment of how much is required is based on the cost of buying annuities, which is the most expensive (but most robustly guaranteed) way to pay promised pensions.  Employers would usually prefer to run the assets and try to earn investment returns, rather than paying so much extra for annuities.  In theory, Sir Philip could take back responsibility for the pension scheme and then underwrite its liabilities either in full, or at better than PPF levels.

    Are there other ways of dealing with the pension scheme?  Sir Philip’s assurances that he intends to fix the pension problem suggest he is working on a strategy to achieve this.  In the past, he looked at a liability management exercise, known as Project Thor, which would enable scheme liabilities to be reduced, while still guaranteeing to pay better benefits than the PPF.  Our pension system allows such exercises to be carried out, but trustees are often nervous of using the flexibilities offered by this route.  He may now be working on a different version of this, designed to pay members’ pensions without going into the PPF.  It will, however, cost a significant amount of money to do this.  He has suggested that he does not just want to pay in money that will go into the PPF and not give his workers better pensions, so that suggests he may want to conduct another liability management exercise, designed to pay better than PPF benefits, without buying annuities, while still standing behind the scheme.

    What would a liability management exercise do?  Pension funds often have members who only worked for the company for a very short time and do not have large pensions built up in the scheme.  The cost of administering these tiny entitlements can be significant.  The law allows employers to offer members a cash sum which can be used for another pension, or taken as cash in later life, in exchange for giving up their small pension in the scheme.  Many members may find this offer attractive and it can then help improve the funding for the rest of the scheme pensions.

    Why would this be attractive?  If Sir Philip does indeed want to honour his pension promises to the BHS staff who worked for him loyally, as he indicated to the Select Committees, then he can do so.  It would require detailed negotiations with the PPF and the Pensions Regulator and would have a large cost attached.  But if the Regulator does decide that the pension scheme was not adequately supported under his ownership, then it has the power to force him to do so.  However, I hope that he will already be working on finding a solution that is acceptable for all.

    What about the Arcadia pensions?  Sir Philip is still responsible for the Arcadia pension scheme.  Along with most UK Defined Benefit schemes, this also has a large deficit.  It is important that Arcadia’s advisers and trustees make sure there are adequate plans in place to address these liabilities.  I assume the Regulator is also looking at this and will be demanding further information as part of its ongoing inquiries.


    3 thoughts on “The BHS Pension Scheme – a Q & A

    1. Bhs is not the only company to have filched the pension fund and got away with it
      Nothing whatever has been done about the pension fund of WWHall which was taken over and filched and the workers are even denied help from the PPF
      Would someone tell me why please because my relative is just one who is suffering

    2. worked for BHS from 2003 to 2008 in Clydebank in Glasgow and still not heard from any one about my Pension have I lost out &why have I no heard anything from any body would have been nice to know what was going on

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