Select committee seeks views on expanding regulator powers

The parliamentary body yesterday issued a call for evidence, asking industry respondents for their opinions on, among other issues, “the adequacy of regulatory powers, including anti-avoidance provisions” and “the sustainability of the Pension Protection Fund”.

The call for evidence comes after the select committee last month published a scathing report on BHS and its previous owners, Sir Philip Green and Dominic Chappell.

In the report, defined benefit pension schemes were labelled “the greatest challenge facing longstanding British businesses”, and a provision that “can appear burdensome and unaffordable”.

Some of the point about BHS was that the purchaser wasn’t suitable, and that’s really nothing to do with the Pensions Regulator

Chantal Thompson, Baker & McKenzie

But the report also stressed: “It should not be forgotten that these liabilities are promises of deferred pay to employees. It is imperative that the regulatory framework does not allow sponsor companies to evade those responsibilities and, in doing so, pass the burden on to other schemes that pay the PPF levy.”

Introducing yesterday’s call for evidence Labour MP Frank Field, who chairs the committee, said: “The lessons of BHS must be learnt. This may mean strengthening the powers and resolve of the Pensions Regulator to act early, quickly and firmly with those who seek to avoid their pension responsibilities.”

He added: “It is important, however, that businesses that are run reputably and responsibly are not put under undue restriction. Ultimately, defined benefit schemes must be placed on a sustainable footing.” 

However, not everyone agrees that the regulator should have a wider arsenal. “It’s not an obvious thing to me that the regulator needs more powers,” said Deborah Cooper, risk and professional leader in Mercer’s retirement business.

She said a likely outcome would be a shift in the regulator’s focus from trustees to employers, but noted that the regulator does have anti-avoidance powers, and that employers already have their own regulators, such as the Competition and Markets Authority.

Cooper said company failures are “shocking” for affected members and pensioners, and a regulator should have all the necessary powers to pursue negligent employers, but pointed out: “It’s quite hard to prove in fact that a company has behaved deliberately badly in relation to its pension scheme.”

M&A blocking powers

The select committee's call for evidence hints at a greater emphasis on supervision, with reference to transactions between companies involving DB schemes. 

“One of the questions the committee has asked here is whether it would have an impact on merger activity if the regulator has more powers,” said Chantal Thompson, pensions partner at law firm Baker & McKenzie.

She said while employers should keep in close contact with trustees when considering corporate transactions, pensions make up one part of the factors behind company failures.

“Some of the point about BHS was that the purchaser wasn’t suitable, and that’s really nothing to do with the Pensions Regulator and the fact is, setting aside the pension scheme, the whole business has gone into administration and 11,000 people have lost their jobs,” she said.

The regulator had been successful in securing positive outcomes for members of schemes, she said, despite the select committee’s frustration at a lack of “magic solution” with BHS.

“It’s got to exercise its powers by reference to administrative law and that law means it cannot act arbitrarily,” she said.

Denting the deficit?

Given the scale of the DB funding crisis, acknowledged in the call for evidence, it might be argued that tackling the deficit, rather than intervening in merger and acquisition activity, would have a greater impact on the number of schemes falling into the PPF.

However, such a move could prove politically toxic and damaging to the industry, according to Tom Selby, senior analyst at AJ Bell.

“You could allow schemes to reduce the value of accrued rights, perhaps by cutting back on inflation protection. However, the damage that could do to trust in pensions would be colossal.”

Statute requires schemes to provide benefit increases in line with the consumer price index, but the wording of many schemes’ rules means they are tied to the retail price index, which can prove costly.

Selby said other methods of taming deficits could be equally tricky to implement: “You could also force companies to pay more in to address their deficits. But this risks hurting employers facing difficulty and diverting investment from the economy – not something the government wants to do at the moment.”

Written evidence on DB pensions can be submitted to the select committee by Friday 23 September 2016.