Robin Ford: Plugging the pension fund gap during the collapse of Arcadia

Robin Ford: Plugging the pension fund gap during Arcadia's collapse

Roughly 13,000 Arcadia employees are at risk of redundancy after the group has gone into administration. The financial difficulties they are facing also include concerns over a £350 million deficit in its defined benefit (DB) pension fund.

There have been reports of a £350 million deficit in the group’s pension fund, which has approximately 10,000 members. The trustees of a DB pension scheme, who are separate from the employer and responsible for running the scheme and protecting the benefits, must ensure the scheme meets the statutory funding objective (SFO). The SFO requires that an occupational pension scheme has sufficient assets to cover its technical provisions. Essentially, this means the current discounted capital value of future liabilities.

If there is a deficit, and the employer cannot meet the SFO, the trustees and employer must agree on a recovery plan. A recovery plan must aim to eliminate the deficit so that the scheme meets the SFO. Funding regulations require the trustees and the employers to reach an agreement over the key scheme funding decisions, with provision for The Pensions Regulator (TPR) to become involved if this cannot be reached. The trustees will take a view on the scheme’s funding position and the contributions agreement will be subject to the rules of the scheme.

If the trustees cannot reach an agreement with Arcadia, in a process that can take up to 15 months, the trustees will have to report this to TPR. It can then try to engage the parties to see if a resolution is possible. While the regulator will not always intervene, it does have the power to impose a schedule of contributions. This means it could, in theory, require Arcadia to contribute to the scheme.

With Arcadia going into administration, staff pensions may transfer to the Pension Protection Fund (PPF), an organisation which protects members of DB pension schemes. The PPF does not take on a pension scheme as soon as an organisation dissolves. Rather, it undertakes an assessment period which involves valuing the scheme to ascertain whether it has sufficient assets to secure the PPF’s standard benefits level. This process takes, on average, around two years.

It is also important to note that the PPF taking over a scheme does not necessarily guarantee someone getting their full pension entitlement. People who are already receiving pension payments will receive their full pension payments subject to caveats. Those who are not receiving their pension yet will receive 90% of their pension promise. There is currently a cap on the amount a person can receive via the PPF, set at £37,315 per annum.

It is not clear how long it will be before the employees of Arcadia know the certainty of their future. The organisation is likely to come under further pressure to personally account for the scheme, even if only on a moral basis. There are alternative resolutions if it fails to do so, but this will take time and does not guarantee full pensions for all employees.

Robin Ford is a solicitor at Capital Law.