In a scathing report published on Monday on the factors that led to demise of the one of the UK’s biggest retailers, the Work and Pensions Committee argued that the future of defined benefit (DB) pension schemes is perhaps “the greatest challenge facing longstanding British businesses”.
All of BHS’s remaining stores are due to close by the end of August after the department store group went into administration in April leaving a £571m ($748m, €681m) pension deficit.
The Committee pulls no punches in placing the blame for the outcome at the feet of former owner Philip Green, who sold BHS for £1 in March 2015; new owner Dominic Chappell, a former bankrupt who took over running the firm; and all the company’s highly paid advisers.
“The demise of BHS was the result of a series of bad business decisions and personal greed,” it said.
However, the Committee went on to note that: “In an environment of rising longevity, interest rates close to zero and intense international competition, defined benefit pension liabilities accumulated in a different age can appear burdensome and unaffordable.”
It stated that, while there may be a case for stronger and more proactive regulation as a result of the BHS catastrophe, what will be needed is a better balance between achieving this goal and enabling otherwise viable companies to continue to operate.
“The jobs of those currently in employment are inevitably in some competition with the pension entitlements of their forebears. Investigating how to secure a fair and sustainable settlement will be at the centre of the Work and Pensions Committee’s ongoing inquiry,” it said.
BHS not alone
The pensions industry has largely welcomed the proposal for an ongoing inquiry into defined benefit pension plans, which comes nearly 25 years after Robert Maxwell jumped off a boat offshore from the Canary Islands after plundering his company’s DB pension fund.
“It’s worth remembering that BHS is by no means alone in allowing a significant deficit to grow while paying out dividends to shareholders,” said AJ Bell’s senior analyst Tom Selby.
There are estimated to be over 6,000 defined benefit (DB) schemes in the UK, with 11 million members and over £1trn of assets.
Selby noted that 54 FTSE 100 companies paid out £48bn in dividends in each of the past two years – almost equal to the £52bn combined deficit of the schemes in 2014.
“The Committee’s pledge to investigate deeper issues facing DB schemes from a ‘pro-capitalism’ perspective can only be a good thing. But policymakers will ultimately be faced with a grim set of choices,” Selby said.
“Restricting dividends for companies with deficits, for example, risks making the problem worse as businesses could be starved of the investment they need to grow, generate cash and profits, and ultimately fund their pension promises.
“If The Pensions Regulator takes a tougher stance on deficit recovery plans it would force firms to redirect cash to funding historic pension promises, rather than investing for growth, while allowing firms to cut back accrued rights would have a potentially devastating effect on trust in the system.”
Better funding pointless
Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association, (PLSA), said the BHS report drew attention to the fact that even the most supportive sponsoring employers find themselves making very difficult choices about how best to balance the interests of their DB scheme and the wider business which supports the scheme, its members and many other employees.
Vidler welcomed the committee’s decision to focus on whether the balance in the regulatory framework between adequate protection and strong enough recourse for schemes and trustees was the right one for the future.
“It is important to recognise that over the last decade employers have put a record amount of money into DB schemes generally but this has made little impact on funding levels because the challenges facing schemes are complex and varied,” he said.
Vidler added that the PLSA’s own Defined Benefit Taskforce has some proposed solutions and will share its work and findings with the Work and Pensions Select Committee
“We believe these will be helpful to the wider inquiry into DB schemes the committee has planned.”
Time kay be tight
Tom McPhail, head of retirement policy at Hargreaves Lansdown noted that the committee may also be facing a tight time scale to produce its recommendations on DB schemes.
“The possibility of an economic slowdown and increasing inflation could exacerbate an already unsustainable mismatch between the promises made to some scheme members and the ability of sponsoring employers ever to pay for those promises,” he said.
“There is an urgent need to take a step back and look at how best to meet the competing demands of all the parties involved. This should be an urgent priority for the new pensions minister,” McPhail said.