The Pensions Regulator should consider British Home Stores’ demise a wake up call

BHS image

Need to know

  • The Pension Protection Fund caps its compensation.
  • Up to 600 UK pension schemes will never pay full benefits.
  • A pension scheme must not adversely impact an employer’s sustainable growth.

The Pensions Regulator (TPR) is under renewed pressure to support employers with large pension scheme deficits following the collapse of British Home Stores (BHS) in April.

The retail giant went into administration with a £571 million defined benefit (DB) scheme deficit, which the scheme’s trustees were hoping to transfer into The Pensions Protection Fund (PPF) at the time of writing in May.

David Blake, professor of pension economics at Cass Business School, City University, and director of the Pensions Institute, says that the 23 years that the BHS independent board of pension trustees gave itself to pay down the deficit as part of a recovery plan devised in 2012 was far too long.

The TPR claims to provide support and guidance to trustees, administrators and employers, so they can reach the best outcome for pension scheme members in the circumstances, ranging from written guidance to engaging with individual schemes.

But Blake believes that targeted early intervention by the TPR would help trustee boards and employers with hefty pension scheme deficits better manage their liabilities and help maximise the outcome for scheme members in the event that an employer becomes insolvent.

The PPF caps the level of compensation it pays out to pension scheme members who have not yet retired, based on an age-related sliding scale, hence it is in these members’ interests for their pension scheme not to be transferred into the PPF should their employer become insolvent.

TPR should acknowledge the impact of poor asset performance, zero interest rates and the continued increase in life expectancy on employers’ ability to manage their scheme deficits, says Blake.

“[TPR] needs to be more proactive in dealing with the issue, [but it] is saying that everything is fine, and that this new responsibility for trustees called the sustainable growth objective will give schemes long enough to fill their [pension] deficit,” he adds.

TPR’s sustainable growth objective was introduced in the Pensions Act 2014 and requires trustees to minimise any adverse impact that a pension scheme may have on the sustainable growth of a scheme sponsor.

Blake’s call for action follows a report he co-authored with Dr Debbie Harrison, visiting professor at the Pensions Institute, Cass Business School, The greatest good for the greatest number: an examination of early intervention strategies for trustees and sponsoring employers of ‘stressed’ defined benefit schemes, published in December 2015, in which he reveals that up to 1,000 DB pension schemes are ‘stressed’ and unlikely to pay member pensions in full.

Of these, the report suggests that the businesses of employer sponsors of about 400 schemes might be viable, but that they will not survive if the scheme deficit remains on the corporate balance sheet. Up to 600 schemes will never pay full benefits, according to the report.

Blake says: “The regulator has the data and knows [which employers are] in the 400 listed [employers] that have some chance of surviving. The issue is whether or not it is prepared to take off its rose-tinted spectacles and realise that this is [a] very serious [issue].”

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He believes that a collaborative effort between TPR, the PPF and scheme sponsors and trustees is required to create, implement and manage a recovery plan for struggling employers. But employers and pension scheme trustees need to highlight the issue with TPR to help drive this effort.

“Everyone wants to keep [the seriousness of the issue] a secret. The trustees don’t want to frighten the [scheme] members and the regulator doesn’t want to frighten everyone else. But the whole point is that [the situation is] going to get worse,” says Blake.