The BHS pension mess

With the BHS pension scheme in the news again yesterday, anyone with a final salary (defined benefit) promise is probably looking at the BHS debacle with justified horror, asking “could this happen to me?” and “might I find my pension cut back?”

Despite ever increasing pension regulation, supposedly increasing member security and a Pensions Regulator tasked with protecting member benefits, it is perhaps surprising circumstances such as these can still happen.

How did this all come to pass?

I feel the likely origin of the current problems is back in 2000, not long after Sir Philip bought BHS for £200m. Shortly after this, Sir Philip’s wife, Tina, received more than £400m in dividends from the company without paying any UK income tax on them as she lives in the tax haven of Monaco. I think there is a strong argument that the damage was done way back then and it never truly recovered.

We also need to remember the regulatory regime pre 2005 was very much different. The funding obligations were not as strict. Who remembers the Minimum Funding Requirement (MFR) that ultimately was deemed not fit for purpose?

In those days, pension trustees took little notice of the strength of the sponsor covenant. Gilt yields were also higher, liabilities were correspondingly lower and, in general, funding gaps were much smaller (if they existed at all). It has been quoted that the BHS scheme had a £5 million surplus in 2000. Indeed, many pension schemes were in surplus on the (now discredited) MFR basis.

Is it entirely fair to blame Sir Philip?

On the face of it, it might seem rather unreasonable. After all, he bought BHS for £200m in 2000 and sold it for £1. However, in the meantime, the shareholders clearly treated the business as a cash cow extracting £580m seemingly to the material detriment of the pension scheme members.

It will be interesting to know what the pension trustees were doing at this time. What kind of negotiations did they enter into? How strong was their position to negotiate for more money to be paid into the scheme to make good the emerging deficit, or take security or restrict the payment of dividends at a time the pension scheme deficit was increasing?

Some commentators are pointing to the actuarial valuation discussions and agreements reached in 2012 as a critical point. At that time Sir Philip and the BHS pension trustees took a decision to agree a recovery plan that paid down the pension fund deficit over a period of 23 years at around £9.5m per year. Given this happened before the new regulatory requirements to consider the sustainability of the sponsor, this does seem a surprisingly lengthy period and small annual contribution in the context of the increasing deficit.

The Pensions Regulator appears to have been aware of the negotiations at the time and presumably got to a point where they became comfortable with the length of the recovery period. However, the circumstances do tend to undermine the Pensions Regulator being viewed as a tough regulator.

Our own experience as pension trustees across many schemes has shown the Pensions Regulator is reluctant to get directly involved with funding negotiations. In my experience, fellow lay trustees are often surprised they cannot rely more on the Regulator to support them beyond taking part in meetings and calls. Trustees are often left with an uncomfortable feeling that no one is really on the same page.

It remains to be seen whether Sir Philip Green will follow through with his reported voluntary offer to pump more money in to the BHS scheme, potentially keeping it out of the Pension Protection Fund (PPF), or whether the Regulator can force Sir Philip to hand over more cash by using their powers. Exactly what dialogue is going on between the various parties (including the pension trustees) is difficult to know.

In an era where the Pensions Regulator’s focus is on good member outcomes for defined contribution (DC) schemes, perhaps some refocus on defined benefit (DB) schemes might now be in order.

 

 

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