Yachts, Pensions and Scandals: the BHS Pension Schemes

Remember Robert Maxwell?

On 5 November 1991, Robert Maxwell who had been reported missing, was found dead after falling overboard from his yacht Lady Ghislaine. Also missing was £450m worth of assets from the pension funds of his companies, meaning that 30,000 pension scheme members were in danger of losing their benefits. What became known as the Maxwell scandal led to the Pensions Act 1995 and other key pensions reforms designed to protect pension schemes from the vagaries of the sponsoring employer. Despite these reforms, the system still relies on some level of voluntary governance routines and controls. 

BHS going into administration and leaving its Pension Schemes with a large deficit is an opportune moment to remind trustees (and employers) of what can go wrong if they do not exercise good governance and controls. What should trustees in charge of a pension scheme with a large deficit do to tackle the deficit if they are concerned that the sponsoring employer is likely to run into financial difficulty? 

Managing risks in defined benefit arrangements

Trustees have an active role to play in assessing the employer covenant. The covenant is the extent of the employer’s legal obligation and financial ability to support their scheme now and in the future. The strength of the covenant is a key consideration when setting actuarial assumptions and negotiating any recovery plan once trustees identify that a scheme is in deficit. The discussions around the valuation are also a good time to agree steps to strengthen the covenant to the benefit of all parties. The strength of the covenant will also be a key consideration when deciding on the appropriate level of risk to be taken. Trustees will want to be satisfied that in adverse investment scenarios the sponsor will be able to fund the resulting shortfall. They will need to identify ways to strengthen the covenant, for example with the provision of a guarantee from another group, a legal charge over an employer’s assets, establishing an escrow account , arranging a letter of credit from the bank and so on.

The Pension Protection Fund

The Pension Protection Fund (PPF) acts as a safety net where a sponsoring employer goes bust and the scheme is in deficit. It is funded by a levy paid by all pension schemes eligible for protection from the PPF.

The Role of the Pensions Regulator 

The Pensions Regulator (TPR) acts as the PPF’s gatekeeper and has a range of powers at its disposal to ensure that there is no call on the PPF. TPR is charged with ensuring that employers do not abuse the Pension Protection Fund regime by arranging their affairs so as to avoid their deficit liabilities. An example would be by removing the pension liabilities by relegating these to a weaker company in the group with the aim that it is then wound-up, in the expectation that the PPF will step in. These powers, known as ‘moral hazard’ powers, include contribution notices (requiring the employer to pay a specified amount) and financial support directions (requiring the employer to put a financial plan in place). 

The PPF works closely with TPR to ensure the best outcome for the members. In particular, the legislation allows for former employers to be on the hook, so in the case of BHS the regulatory authorities will want to investigate the details surrounding last year’s sale from Arcadia Group, owned by Sir Philip Green, to Retail Acquisitions for £1. What is clear is that a significant part of the deficit relates to Green’s watch because when he first purchased BHS, the Pension Schemes were in surplus. Where employer related events cause the covenant to materially change, the trustees will want to understand the impact. Such events include mergers and acquisitions, dividend payments, refinancing etc. However, in reality the trustees’ ability to agree appropriate mitigation with the sponsor is difficult as in reality, Trustees are not party to the sale and purchase agreement and so are unlikely to be privy to the details of the transaction. Their degree of involvement will depend on the relationship between employer and trustees.

Nevertheless, in the BHS case, the Trustees will want to work closely with TPR and the PPF to see if they can find another ‘person’ who will pay the £571m deficit. If attempts to fund the deficit fail, the BHS Pension Schemes (currently under assessment for entry into the PPF) will enter into the PPF. At that point, the PPF will assume the trustees’ responsibilities and the trustees will be discharged from their roles. The members will receive compensation from the PPF in place of their pension entitlement. Only members who were already receiving a pension at the date the Schemes entered the assessment period will receive their pensions in full. Those who were deferred members and yet to receive their pension at that date will get at least 10% less than they would have expected and an overall cap could apply. Latest figures show that there are currently over 13,000 BHS Pension Scheme members who would receive the reduced PPF level of benefits.

Another Yacht

Apart from the legal question of whether Arcadia can be on the hook for the debt as a former owner, a moral point also arises here. Sir Philip Green will have a very tough time explaining why it should not be him who pays off the debt when he and his family collected £586m in dividends, rental payments and interest loans during their 15 year ownership of the retailer. Add to the mix that the Greens are about to take possession of a £100m yacht named ‘Lionheart’ ordered by his wife, why should the PPF be left to pay the benefits?