The failure of BHS raises big questions about what happens to those schemes that are guaranteed to fail
That BHS has finally gone into administration is hardly surprising. Nor is it a shock that its pension scheme will have to be absorbed by the Pensions Protection Fund.
Back in March a Company Voluntary Arrangement (CVA) proposed by the firm was accepted by its creditors. This would have seen landlords and other creditors voluntarily taking a hit to keep BHS out of administration.
Could BHS be the tip of the iceberg?
But the £571m shortfall in its pension fund also needed to be addressed, and the firm held talks with the PPF to explore options for offloading the scheme onto the lifeboat fund. The CVA was ultimately scuppered however, as the department store chain failed to secure the financing it needed to restructure.
The Pensions Regulator is currently investigating to see whether it can use its anti-avoidance powers”
Malcolm Weir, head of restructuring and insolvency at the Pension Protection Fund said: “Following the BHS CVA last month we had been in discussions to find a solution that was in the best interests of the pension schemes and the company. However following the BHS announcement that it has filed for administration the PPF will now work with the Pensions Regulator and other parties to secure the best outcome for the pension schemes.”
At first, as with Tata Steel, this looks like a simple case of an ailing industry failing to manage its pension schemes. And in many ways it is. But actually the facts are more complicated.
There are questions over whether the current and former BHS owners diverted money that should have been used to plug the pension deficit, and the Pensions Regulator is currently investigating to see whether it can use its anti-avoidance powers. These powers allow it to act when it believes that an employer is attempting to avoid its pension obligations, leaving the PPF to pick up the pension liabilities.
A spokesperson for the regulator said: “We can confirm that we are undertaking an investigation into the BHS pensions scheme to determine whether it would be appropriate to use our anti-avoidance powers.”
Such investigations can take a long time, and we may not know for months or years whether the company is found to have acted inappropriately. What is noteworthy is that the regulator has commented at all, as it is usually tight-lipped when it comes to its investigations.
While it is not yet clear whether the investigation will centre on the current owner - a consortium led by Dominic Chappell – or its prior owner, Sir Philip Green who sold the chain for a pound last year, a source close to the situation has indicated that the regulator will be taking a keen interest in any money that has been taken from the company in the years before its eventual fall into administration.
Professor David Blake, director of the Pensions Institute argues that both the regulator and the PPF should be “very concerned” about this. His argument is not just that BHS could have been “gaming the PPF” but also that there are a thousand of other ‘zombie’ pensions schemes out there, that could find themselves in the same boat.
We’re predicting that there are up to 1000 companies in this position”
He said: “When Philip Green took over the scheme had a surplus of £6m according to the news reports and now it’s got a £350-500m deficit depending on whether you value it on an ongoing basis or the buyout basis.
“Your scheme actuary tells you every three years [how your scheme is doing]. So he must have had five times where the scheme actuary told him that things aren’t going well and rather than put money into the scheme he was taking money out, in £400m worth of dividends.
“We’re predicting that there are up to 1000 companies in this position. With the small ones it doesn’t really matter, but this is an example of a big one.”
In a research report published in December 2015, the Pensions Institute estimated that there were 1,000 DB pension schemes at serious risk of falling into the PPF. In aggregate these 1,000 schemes represent liabilities estimated at £225bn with deficits estimated at £45bn.
Of the 1,000 distressed schemes, which include about 25 of the largest schemes in the UK, each with £1bn or more in liabilities, the institute predicts that 600 sponsoring employers will never pay full pensions, with many of becoming insolvent in the next five to 10 years – just as has happened with BHS.
This is deeply concerning. On a fairly obvious level, there are worries about the members of these schemes whose pension payments will be reduced.
There are deeper questions about what this means for the PPF as an organisation”
But there are deeper questions about what this means for the PPF as an organisation. The BHS failure alone has prompted a work and pensions committee enquiry into how the receipt of the pension liabilities from BHS, which has a £571 million deficit in its pension scheme, will affect the fund and its users.
There will clearly be an impact on other pension schemes if the PPF has to swallow many more schemes with deficits this large, particularly in terms of a possible levy increase as a result.
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The chair of the Work and Pensions Committee Frank Field MP said: “We need as a committee to look at the Pension Protection Fund and how the receipt of pension liabilities of BHS will impact on the increases in the levy that will now be placed on all other eligible employers to finance the scheme.”
Blake said: “Basically, you’re going to get bad driving out good here because this scheme will no longer pay the levy and it’s a bad scheme. That means the levy will have to go up for the remaining schemes that are good…. The good schemes are paying the price of the bad schemes.”
The good schemes are paying the price of the bad schemes”
However, it is important to note that the PPF is geared up to absorb schemes of this size – that’s why it is currently running a surplus of £3.6bn. And the BHS isn’t even in the organisation’s top five claims, although it is one of the larger ones in recent years.
But if you believe the Pensions Institute’s estimate of £45bn in stressed scheme deficits, the picture is more bleak.
Blake said: “It’s not good because this is a huge deficit. [The PPF] get their money from the levy and from the assets that they take over and from their investment performance.
“The investment performance of the Pension Protection Fund has been very good. They’ve been very good at hedging their risks and they’ve had very successful performance. So you have to rate them as among the best pension fund managers that we’ve got. But not even with all that are they going to overcome the size of this deficit, because it’s huge.”
The PPF’s own figures are less alarming, with the organisation’s modelling framework suggesting that the lifeboat fund should be on track to cope with any schemes that need its help over the next ten years.
There are schemes that are so poorly funded that they are never going to make it”
What is clear, however, is that not all schemes will make it. Indeed, when Engaged Investor spoke with Alan Rubenstein, chief executive of the PPF, back in March he said: “Even with a rise in interest rates there are a rump of schemes that are so poorly funded that they are never going to make it. To my mind it would make sense for us to accept that fact and figure out what the solution is.”
Some of those schemes may have sponsors that are unable to meet the funding pressures on their scheme, while other firms may be simply shirking their obligations.
The latter should fall foul of the Pensions Regulator’s anti-avoidance powers. After all, TPR has a statutory duty to reduce claims on the PPF. And those questioning whether its powers are strong enough to prevent employers trying to game the system will be reassured to hear that the Work and Pensions Committee will be examining just that.
Field concluded: “We will then need to judge whether the law is strong enough to protect future pensioners’ contracts in occupational schemes.”