Pension Interview: Exploring the issues around the BHS pension fund bailout
Pensions analysis: With Sir Philip Green finally agreeing an out-of-court settlement to bail out the collapsed BHS pension fund, Jennie Kreser, head of the pension law practice at Silverman Sherliker, discusses the implications for all involved.
What is the background to The Pensions Regulator’s (TPR) agreed settlement with Sir Philip Green in the BHS pension schemes saga?
Essentially it’s based on TPR’s investigation following the collapse of the BHS pension arrangement. As the regulator of UK pension schemes TPR has a responsibility to oversee the good running and adequacy of funding of UK pension arrangements, so when BHS came crashing down they felt they had to step in to look into what had happened and why.
One of their statutory remits is to protect the Pension Protection Fund (PPF), so perhaps most importantly they had to try and secure benefits for the scheme members to avoid the scheme falling into the PPF.
What are the particular features surrounding the deal by between TPR and Sir Philip Green regarding the schemes? What role did the PPF play?
There have been arrangements with other schemes which have faced this kind of situation, so it’s not unique that the regulator has pursued someone connected to the scheme for additional funds. That’s just part of its business-as-usual activity. It’s probably the best that could be achieved in all of the circumstances though.
It’s taken a long time to get to where we’ve got and we probably haven’t seen the detail of the settlement. For example, I don’t think we yet know whether he’s actually paying £363m in cash or if there is some other way that the new scheme is being established. However, it’s a hefty chunk. I think the deficit is currently standing at around £530m so this is around
two thirds of the outstanding deficit.
I suspect the PPF would have been involved in the negotiation, but they may not have taken a massively active part other than to be relieved that they won’t have to take on a significant liability now as a result of the deal.
What are the particular pension arrangements and advantages of a deal like this for members and beneficiaries of the BHS pension schemes?
The deal is a three-part arrangement. The first part is to establish a brand new shiny pension scheme which members will be offered the opportunity to join. If they do that, the advantage is that the benefits they will get from joining the new scheme will be better than what they would have got had the scheme fallen into the PPF. That’s quite a significant Advantage - for example, death benefits will be better than they would have been under PPF compensation, there will be pension increases for pre-1997 service, and obviously members won’t be subject to the PPF compensation cap and will get the full starting benefit under the new scheme.
The second part of the deal is that for those who’ve got essentially a trivial benefit - up to £18,000 - they will be able to cash out which can make a certain amount of sense. As far as the new scheme is concerned, it means that they don’t have to administer very small benefits, which can be expensive from an administration point of view, and although we don’t yet know the commutation rate, as long as it is a good one it can make sense for the members too.
I suspect there will be quite a few people whose benefits will be quite small. Shop workers don’t earn a lot of money and as it is fairly typical for shop workers to move on quite quickly they may have only been in the scheme for three or four years.
The third option for those who, perhaps unwisely, may have some reason to choose to stay with the existing BHS scheme, they will simply get PPF benefits with all of the restrictions that that will mean. I’m not sure why people would choose to stay but some may be slightly suspicious. They shouldn’t be because the governance arrangements are such that it will be run by three completely independent trustees. Philip Green will have absolutely nothing to do with it - his role begins and ends with paying in the money.
If anyone gets even a modicum of independent financial advice, I suspect they will be advised to go into the new scheme.
Does the BHS deal indicate an increased appetite for TPR to reach settlements of this sort?
As I mentioned earlier, the BHS situation is not unique. For example, it’s also been confirmed recently that a settlement has been reached with the Coats pension arrangement so it may indicate that they are going to be a little bit more proactive when this kind of situation arises. On the other hand, the number of defined benefit pension schemes out there is reducing almost daily and I suspect there are whole swathes of TPR staff actually starting to look at DC arrangements because they’ve got to justify their existence going forward.
Clearly BHS was a very high profile collapse and there was a certain amount of pressure on TPR to come to some arrangement. My personal view is that TPR has got a lot to answer for as to why BHS collapsed in the first place and what were they doing to allow the 25-year recovery plan to be put in place. They dropped a ball on that and it’s all being swept very quickly under the table.
What is the likely timetable for implementation of the settlement? What are the next steps for trustees, the PPF and TPR?
It’s certainly going to be a good few months before the scheme can be set up and established. I’m not sure how they will appoint the independent trustees. TPR has a panel of independent trustees and they may pick from that or try and put in the equivalent of a member-nominated trustee, but that’s some of the detail that is still to come out in the wash.
It’s not going to happen overnight. In principle the scheme can be established very quickly in the sense of getting interim documentation in place, but I think there are quite a lot of issues before that happens about how the transfer is going to take place - whether it’s going to be an active opt in or a transfer without consent and a member will have to opt out if they want to stay in the old scheme. The members need to be given a lot of information to decide if they’re going to transfer. I think they will be given the option to take independent financial advice and that is right and proper and I suspect that will be paid for out of the funds.
Interviewed by Fran Benson. This article was first published on Lexis®PSL Pensions on 7 March 2017. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.