Parliamentary report into BHS highlights problems with defined-benefit pension schemes

David Kingman looks at what the House of Commons Work and Pensions select committee inquiry into the collapse of BHS had to say about defined benefit pension schemesIF_Blog_BHS_High_Street_Lincoln_Wikimedia

The House of Commons Work and Pensions select committee has recently published its official report into the insolvency of BHS. As most commentators expected, the committee directed most of its criticism of the collapse of the firm, and the ensuing uncertainty about the fate of its pension scheme, towards former owner Sir Philip Green, whose approach to running the company was branded “the unacceptable face of capitalism”.

However, the report also made some points which have relevance to the wider problem of defined benefit pension schemes that run into funding problems, and how the government – particularly the oversight body The Pensions Regulator – should deal with them.

“Stronger and more proactive regulation”

BHS’s pension scheme has been identified as one of the main reasons for the firm’s collapse, as its deficit of £571 million at the point when the firm went into receivership has been highlighted as a major sticking point that put off potential buyers.

Now that BHS has gone into receivership, the pension scheme has fallen under the auspices of the Pension Protection Fund (PPF) – the government-run “lifeboat” which exists to rescue distressed schemes and ensure that their members are taken care of.

The committee’s report raises the problem of moral hazard which the existence of this rescue mechanism can create. When the management of a scheme’s sponsoring employer knows that the scheme could be rescued by the PPF in the future, it undermines the incentive to run the scheme responsibly. The report highlighted that under Sir Philip’s management, BHS repeatedly resisted requests from the pension scheme’s trustees for the firm to pay into the scheme the employer contributions which it owed:

“BHS declined to make the employer contributions necessary to maintain the sustainability of the pension schemes over the duration of Sir Philip Green’s period in charge…Trustee demands for increased contributions were initially resisted on the grounds that investing in the business would be more lucrative and then, when BHS’s struggles intensified, on the grounds they could not be afforded in a company that was, in the words of Mr Coackley [BHS’s Chief Operating Officer], being ‘stripped to the bone’.”

If the scheme is fully absorbed by the PPF it will demonstrate an additional moral hazard; as the PPF is funded by a tax on private sector defined benefit pension schemes, it can effectively facilitate a transfer of money from those firms that have run their schemes responsibly (including many small firms) to those that haven’t.

Challenging climate

Although the vast majority of its criticism was reserved for Sir Philip Green and the team he later sold BHS to, Retail Acquisitions Limited, The Pensions Regulator (TPR) also received some criticism for being “reactive and slow-moving”, particularly concerning its failure to act quickly and decisively when it was presented with a 23-year recovery plan for the BHS scheme in late 2014.

The committee noted that “TPR will increasingly be called upon to make decisions crucial for thousands of employees and pensioners in a fast-moving and uncertain environment. It is essential that it has the powers, resources, leadership and commercial acumen to act decisively.” According to the latest assessment of defined benefit schemes which was undertaken by the PPF, across the private sector 4,995 final salary pension schemes are in deficit, compared with only 950 in surplus; their collective deficit is reckoned to amount to £383 billion.

Although the MPs concluded that the way BHS was managed by Sir Philip Green was the main reason for the company’s current predicament, they also noted that it suffered from the same underlying problems with its pension scheme – low interest rates, rising longevity and increasing global competition – which threaten the sustainability of many others in the private sector. The Work and Pensions select committee is now planning to undertake a separate inquiry into the private sector pensions landscape which will address these broader challenges that it faces.

Image: BHS, High Street, Lincoln, England, December 2015. By Mtaylor848 (Own work) [CC BY-SA 4.0 (], via Wikimedia Commons.