Government warned against 'knee-jerk' reactions on DB funding after BHS

Administrators Duff and Phelps last week announced the closure of 163 BHS stores and 11,000 job losses after several unsatisfactory buyout offers.

They said the working capital required to secure the company’s future proved prohibitive to a successful acquisition.

Members don’t understand the protection mechanisms that exist, so inevitably this is going to erode confidence

Richard Butcher, PTL

The winding down of the chain has also cast further doubt over the financial future of some 22,600 members of the two BHS DB pension schemes.

Risk to the scheme

In an interview with the BBC, Labour MP Frank Field called the announcement “appalling news”, adding: “There’s a real worry that the pension scheme – if there’s no company – is in effect orphaned.”

Kate Smith, head of pensions at Aegon, said members will hope that the schemes and their £274m combined deficit are absorbed by the Pension Protection Fund.

“It looks very likely that the BHS scheme will be rescued by the pensions lifeboat, given its widely reported financial position and that no buyer has been found to take on the company and scheme,” she said.

PPF investigations into whether schemes have enough assets to pay benefits at PPF level are typically lengthy assessments, with schemes waiting up to a year before they enter the fund.

Even if the BHS Pension Scheme and BHS Senior Management Scheme both enter the PPF, active and deferred members could still see their pensions cut by 10 per cent, she added.

Risk to the PPF

The size of the BHS problem could even put at risk the position of the PPF, according to PTL managing director Richard Butcher.

The Work and Pensions Committee, led by Field, is conducting an ongoing inquiry into the company’s collapse after it was sold by Sir Philip Green for £1 last year.

Field has hinted at calling for legislation preventing businesses from paying dividends to shareholders without first improving scheme funding or securing trustees’ consent.

But Butcher urged government not to make “knee-jerk” reactions that might jeopardise future DB funding negotiations.

The level of scrutiny to which BHS has been subjected is likely to provoke a more conservative approach in future, not only from the regulator but also from trustees and lawyers.

This in turn could frustrate the progress of upcoming funding negotiations, and might even erode member confidence in the pensions industry as a whole.

“Members don’t understand the protection mechanisms that exist, so inevitably this is going to erode confidence,” said Butcher.

“Pension saving is difficult,” he added. “There are an awful lot of people who are looking for excuses not to save for their retirement and they will use this as an excuse.”

Earlier this month it was revealed that BHS had exploited a widely used loophole to halve its annual PPF levy while under Green’s leadership.

According to the Financial Times, documents showed that the retailer used an intra-group guarantee to pass a portion of its funding burden on to other companies in the Arcadia Group.

Appearing before the Work and Pensions Committee, PPF chief executive Alan Rubenstein said the guarantee was “pretty much” worthless. The PPF tightened the rules on guarantees between 2012 and 2013.

Experts said the exact impact of the scandal is difficult to predict due to the vast number of variables, but agreed that fallout from the BHS collapse and negotiations over British Steel could affect the entire pensions industry.

Jade Murray, Pensions Partner at Addleshaw Goddard, said lawmakers may well want to “provide alternative options” in order to keep large schemes and their deficits out of the PPF.

The headline of this article and wording with which we reported remarks of Ms Smith and Mr Butcher have been revised since original publication to amend any inaccuracy.