Events relating to the underfunded BHS and British Steel pension schemes have unfolded protractedly and publicly and this has ensured that the issue of "stressed" sponsoring employers of defined benefit (DB) pension schemes remains highly topical, both in the pensions industry as well as amongst the wider press and general public.
This article considers recent developments in this area, including the two most high-profile cases mentioned above and the wide-ranging Green Paper highlighting the key challenges facing DB schemes.
The Pensions Green Paper
In its Green Paper published in February, the DWP stressed that overall deficits held by DB schemes vary over time, for example having reduced from £459bn in August 2016 to £197bn in January 2017, and many sponsoring employers whose schemes are in deficit would be able to clear that deficit if required. According to the Government there is little evidence that deficit reduction contributions are driving sponsoring employers to insolvency on any significant scale and, notwithstanding the high profile circumstances of the BHS and British Steel schemes, DB schemes are not considered inherently "unaffordable".
Nevertheless, the events relating to the BHS and British Steel schemes have led to a wide-ranging review of the operation and regulation of DB schemes by the Government, in particular, the ease with which stressed employers may extricate themselves from an underfunded DB scheme. In the Green Paper, the DWP sought comment on a broad range of proposals aimed at reducing the burden of deficits on stressed employers whilst protecting the interests of members. Consultation on the Green Paper closed on 14 May 2017, and it will be interesting to see what the response will be to those wide-ranging proposals.
The DWP has confirmed that it will publish a White Paper this winter about the future of DB pension schemes. The paper will provide “more proactive powers rather than reactive” for the Pensions Regulator (TPR) and consider innovative delivery structures such as consolidation.
BHS went into administration in April 2016, leaving behind a DB pension scheme with over 20,000 members and a deficit of around £571m. TPR's high-profile enforcement proceedings against, amongst others, Sir Philip Green (the former owner of BHS), culminated in an agreed settlement in February 2017 under which Sir Philip will make a payment of £363m towards the creation of a new employer-less scheme (the first of its kind to be sanctioned by TPR).
Members will be able to choose between transferring to the new scheme, entering the Pension Protection Fund (PPF) with the existing scheme or, where the total value of their benefits is up to £18,000, taking a lump sum benefit. Members' individual circumstances will dictate which option is most beneficial to them, but benefits under the new scheme are expected to be greater than those payable under the PPF.
TPR views the BHS settlement as a good outcome given the likely risks and costs involved in pursuing its enforcement action further, and it may be cited as evidence of the efficacy of the current system for protecting members in schemes with stressed sponsoring employers. This has not, however, silenced calls for greater powers to be conferred on TPR to protect members' interests in such cases.
The British Steel pension scheme is under particular scrutiny because of its size – the £15bn scheme has 130,000 members and, on December 2015 figures, an estimated deficit of £1.5bn based on the payment of PPF-level benefits.
Tata Group, the parent company of the scheme's sponsoring employer, Tata Steel UK Limited (Tata UK), has recently pledged investment of £1bn into its struggling UK operations, on the condition that members are transferred to a new defined contribution (DC) scheme for future accrual and that Tata UK is relieved of its liabilities under the existing scheme. Members voted to be transferred into the DC scheme in February (in the hope of obtaining better job security) and it was announced on 16 May 2017 that the relevant parties have agreed the key commercial terms of a type of restructuring known as a regulated apportionment arrangement (RAA).
Under the RAA, a £550m payment and 33% stake in Tata UK will be used to benefit the existing scheme and help fund a new scheme sponsored by Tata UK offering "modified" benefits to members, who will be given the option of transferring to the new scheme or entering the PPF with the existing scheme. It is understood that the new scheme will provide lower future annual increases for pensioners and deferred members. The trustees of the scheme have previously called for legislation to permit them to alter the indexation provisions of the scheme's rules. Reducing members' benefits was described in the Green Paper as a "highly contentious" and "radical" approach to addressing deficits, even in cases involving stressed employers, but it may be that reduced benefits are necessary to keep the scheme out of the PPF.
And now Hoover…
While all eyes were on British Steel and BHS, TPR announced at the beginning of June that it has formally approved its first RAA of 2017 (and only the second in the last two years) relating to Hoover Ltd. As part of the arrangement, the Hoover (1987) Pension Scheme, which has 7,500 members, will receive £60 million from Hoover and is expected to transfer into the PPF. The scheme will also receive ordinary shares representing a 33% stake in Hoover.
TPR stresses that it does "not agree to these types of arrangements lightly but in this case we believe it is the right outcome for scheme members and the PPF. RAAs can also be a useful means to keep companies afloat and preserve jobs". To ensure that RAAs are not abused by businesses seeking to offload their pension liabilities, TPR "insisted on clear and extensive evidence to show that Hoover would inevitably fall into insolvency without a restructuring of its pension arrangements.”
Following the General Election result, it will be interesting to see what the Government's approach is to the issue of stressed sponsoring employers. The main political parties' pre-election manifesto pledges relating to pensions did not attempt to tackle this highly contentious issue. However, the Conservatives appeared to be targeting the public feeling regarding the management of the BHS scheme by proposing punitive fines for "wilfully" under-resourcing schemes and criminal liability for directors who "deliberately or recklessly" put a scheme's ability to meet its obligations at risk. The Conservatives also proposed greater powers for schemes and TPR to scrutinise and even block corporate takeovers in certain conditions.
With good reason, TPR does not routinely permit sponsoring employers to extricate themselves from underfunded DB schemes without requiring the payment of liabilities in full. The prospective British Steel RAA represents a rare exception to this rule and the proposed employer-less BHS scheme represents the first of its kind. Both are examples of greater flexibility being permitted in situations where insolvency is otherwise inevitable or highly likely with the aim that a significant proportion of members retain higher benefits than they would in the PPF.
The development and details of the British Steel RAA in particular will be of great interest to employers and trustees in providing guidance as to when an RAA and similar arrangements may be authorised in practice.