14 Dec 2016

The pensions headlines this year have been dominated by the fallout from the collapse of BHS. We take a look at how events unfolded and at the gathering momentum for change.

Timeline

  • 2000 - Sir Philip Green buys BHS for £200m. At the time, BHS’s two defined benefit schemes had a combined surplus of approximately £43m
  • 2002 – 2004 - BHS shareholders extract approximately £422m from BHS in dividends, the majority of which went to the Green family
  • 2015 – The pensions deficit reaches £345m. Sir Philip Green sells BHS to Retail Acquisitions for £1 and the Pensions Regulator (the Regulator) launches an anti-avoidance investigation
  • 2016 – BHS undertakes a company voluntary arrangement and the schemes enter into a Pension Protection Fund (PPF) assessment period in March (the pensions deficit is assessed at around £570m). In April, BHS goes into administration followed eventually by the winding up of the company.

Parliamentary Committees’ Report: the “unacceptable face of capitalism”  

Earlier this year, in the midst of the events described above, the Work and Pensions Committee and the Business, Innovation and Skills Committee published the report of their enquiry into BHS’s collapse. The report was highly critical of Sir Philip and described the decline and subsequent sale of BHS to Retail Acquisitions as the “unacceptable face of capitalism”. The report determined that BHS’s reluctance to make the necessary employer contributions to sustain the pension schemes over the period of Sir Philip Green’s time in charge was the main reason for the increased deficit. The Trustees’ requests for more contributions were initially rejected in favour of investment in the business but, more recently, the Trustees were told that increased contributions were unaffordable due to the poor state of the business.

The report also criticised the Regulator as being “reactive” and “slow-moving” in the collapse of BHS. It noted the Regulator’s own submission that a “more proactive supervisory approach” and “stronger requirements for sponsors to co-operate with, and provide information to trustees and [the Regulator]” may have produced a better outcome.  Additionally, the Regulator commented on the limitations to its current powers saying "our experience of using these existing mechanisms is that on occasion and in specific circumstances they can be inflexible and pose some challenges to operate and enforce in practice”. Accordingly, the report concludes that "it is essential that [the Regulator] has the powers, resources, leadership and commercial acumen to act decisively".

Currently, the Regulator has relatively limited powers of intervention in corporate sales. It can require employers to put in place financial support arrangements for underfunded pension schemes or to make cash payments to the scheme. To do this it must, broadly speaking, believe that there has been an act which detrimentally affects the scheme in a material way, or that the scheme is insufficiently resourced, and that it is reasonable to impose such an obligation on the employer. However, the Regulator cannot prevent the sale of a company from going ahead and relies instead on the supposed deterrent effect that its powers may subsequently be used.

On 2 November 2016, the Regulator’s investigation into BHS culminated in it sending warning notices to Sir Philip Green, requiring him to pay £350m in respect of the pension schemes. Sir Philip has since offered £250m in response, presenting it as a “credible and substantial proposal”.

Wider enquiry: call for further powers

The Work and Pensions Committee has now launched a wider enquiry into pensions law and “defined benefit pension schemes in their entirety” in order to investigate whether there is a case for reform in light of the BHS saga. The Regulator has used this opportunity to call for:

  • the development of its operational approach to focus more intensively on schemes posing the greatest risk
  • greater information-gathering and investigatory powers
  • greater flexibility over valuation periods, including requiring more regular valuations for high-risk schemes
  • further clarification of its scheme funding powers
  • mandatory clearance to be needed from the Regulator in circumstances where corporate activity might pose a material risk to a scheme.

The PPF has also responded to the enquiry, recommending:

  • a more interventionist approach to the regulation of scheme funding, with restrictions on the terms of recovery plans
  • a more streamlined approach to the use of the Regulator’s current powers to demand contributions and financial support for pension schemes
  • that the Regulator be given powers to wind up pension schemes at the request of the scheme trustees or the PPF and to fine employers who seek to avoid pension liabilities.

Pre-pack sales: Christmas turkeys

The Work and Pensions Committee also commissioned a report into the pre-pack sale of Bernard Matthews Ltd, which concludes that it may have been “carefully crafted to enable secured creditors and controllers of Bernard Matthews to extract maximum cash from the company and dump the pension scheme and other liabilities". The Bernard Matthews Pension Fund, which has a deficit of £17.5m, is "set to receive no more than 1p in the pound, or perhaps next to nothing”. It is likely that the PPF will now take the scheme on, resulting in reductions to members’ benefits.

Frank Field MP, who chairs the Committee, commented that such pre-pack arrangements are a huge detriment to pensioners and are “no doubt an issue the Committee will want to look at early on Parliament’s return”. The PPF’s chief executive has commented that greater protections should be put in place to ensure that schemes cannot be effectively displaced in the creditor 'pecking order' by investors when they become involved in such situations.

What next?

At the moment it is a question of ‘watch this space’ in relation to the findings of the wider enquiry instituted by the Work and Pensions Committee. The Government has said that it will present a green paper “on the challenges facing defined benefit pensions in the winter" (now expected early in the new year). It is aware of the "understandable concern … expressed in many quarters about the impact on employers of defined benefit pension schemes, and the sustainability and security of the defined benefit system". As a result, and following the call by the Regulator and the PPF for stronger powers, employers should expect a greater level of scrutiny of transactions deemed to materially affect their pension scheme.