Summary
Our inquiry on the collapse of BHS provided the backdrop to our broader work on defined benefit (DB) pension schemes. BHS was an extraordinary tale characterised by behaviour fortunately very far removed from the usual standards of British business. The case, and other high-profile schemes in difficulty, did however highlight wider flaws in DB schemes and their regulation. The Government intends to publish a Green Paper on the issue in early 2017. In this report we make recommendations for changes which should be taken forward or consulted on in that document.
Our approach
In our recommendations we have sought to avoid knee-jerk recourse to additional box-ticking regulation. Instead we have aimed to put incentive structures in place to make it more likely that DB pension schemes will be sustainable and that employers will honour their responsibilities. In turn, this will make it less likely that the Pension Protection Fund (PPF), the pension scheme lifeboat, will be called upon. Responsible employers, which are the overwhelming majority, have nothing to fear from what we propose.
A nuclear deterrent to avoidance
Our most high-profile recommendation epitomises this approach. The existing anti-avoidance powers of the Pensions Regulator (TPR), which act as its final backstop to ensure scheme sponsors honour their promises, are retrospective and often exercised through drawn-out legal battles. An employer seeking to avoid his or her responsibilities may well take a punt on risking enforcement action, leaving pensioners in extended limbo. We wish to deter such behaviour and encourage sponsors to properly fund schemes and seek clearance for corporate transactions which may be to their detriment. We recommend the Government consult on proposals to empower TPR to impose punitive fines that could treble the amount payable. The intention would be that such fines would not need to be imposed: they would act as a nuclear deterrent to avoidance.
Empowered trustees and scheme members
We want to arm trustees with the powers necessary to represent the interests of scheme members. It is unacceptable that scheme sponsors can keep them in the dark: trustees should be able to demand timely information. We also recommend the Government consult on proposals to enable trustees, subject to TPR approval, to:
- consolidate small schemes in an aggregator fund to be managed by the PPF, creating economies of scale for both schemes and TPR; and
- agree changes to the indexation of pension benefits in instances where such changes are needed to make a scheme sustainable, including conditional arrangements that will revert to original uprating when good times return.
Scheme members should be given greater flexibility to take their pensions as lump sums. This could prove to be in the interests of both the individual and the longer-term viability of the pension scheme.
A nimbler regulator
Regulatory intervention is currently often clunky and can be concentrated at stages when a scheme is in severe stress or has already collapsed. We envisage a nimbler TPR intervening earlier to nip potential problems in the bud; a rebalancing, rather than ramping-up, of regulatory action. This approach should be evident in the scheme valuation process. TPR should never again take two years to intervene in a negotiation concluding with a 23 year deficit recovery plan:
- the timetable for valuations should be flexible—shorter or longer—to reflect the riskiness of schemes;
- the statutory timescale for the submission of valuations and recovery plans should be reduced to nine months, though TPR should intervene sooner where it has concerns; and
- recovery plans of more than ten years should be exceptional.
A PPF levy that fairly reflects risk
The risk-based PPF levy is up for review. It is important that where possible it is improved regularly to reflect risk accurately. We call on the PPF to consult on means of adjusting the calculation of the levy to:
- incentivise key aspects of good scheme governance; and
- ensure particular types of employer, including SMEs and mutual societies, are not unfairly disadvantaged.
Facilitating scheme restructuring in mutual interest
The Regulated Apportionment Arrangement (RAA) is a means of negotiating an outcome for scheme members that is better than the PPF in instances where a sponsoring employer is in mortal danger. When agreed, it can produce results that are better for pensioners, better for employers and better for the PPF than insolvency. It is, however, very rarely used. It is an emergency measure, but it does not operate at an emergency pace. TPR should take a more active approach to its involvement in their negotiation. The Government should consult on streamlining the RAA process and amending the barrier of imminent and inevitable insolvency.
Mandatory clearance in certain circumstances
The voluntary practice of seeking TPR clearance for major corporate transactions has fallen out of fashion: there were just 9 cases in 2015–16 compared with 263 in 2005–06. We are wary of impeding the normal economic activity of mergers and acquisitions, but there is a strong case for clearance to be mandatory in certain circumstances when there is the greatest risk of material detriment to pension schemes. We recommend the Government consult on rules regarding the size of the pension deficit relative to the value of the company and the viability of the ongoing plan for supporting the pension scheme as the basis for a mandatory clearance when corporate changes could damage a pension scheme.
Avoiding another BHS
It is inconceivable that Sir Philip Green’s deal to dispose of BHS and its giant pension deficit—for £1 to an unqualified man with no plan for the pension schemes and no means of financing one—would have evaded or passed any mandatory clearance scheme. Throughout our inquiry we tested whether potential recommendations would reduce the chances of another pension scheme collapsing in the manner of BHS. Under our proposals:
- the BHS trustees would have been empowered to demand timely information from the uncooperative sponsor and may have been able, through a streamlined restructuring process or adjustments to indexation, to make the scheme more sustainable while securing better than PPF outcomes for members;
- many scheme members may have taken their pensions as lump sums under more flexible rules, to their benefit and to that of the schemes;
- TPR would have intervened more actively in the 2009 and 2012 valuations, requiring concessions from Sir Philip, abridging the valuation schedule and never allowing a 23 year deficit recovery plan to be considered as a serious proposal; and
- Sir Philip would have faced far stronger incentives to “sort” the pension scheme during his ownership owing to the nuclear deterrent of a potential punitive anti-avoidance fine that could treble the amount TPR could recover from him.
It will, of course, be of no comfort to the 20,000 BHS pensioners facing cuts to their promised pensions, but had just some of these measures been in place then they may never have ended up in that situation.
© Parliamentary copyright 2015
20 December 2016