The Pensions Regulator (TPR) this week confirmed a £363m settlement with Sir Philip Green, whose Arcadia conglomerate sold BHS in 2015, a year before it filed for bankruptcy. The money will pay for a new scheme to be set up, paying better benefits than are available from the PPF.
The new scheme will be established in the next few months, according to TPR. This means it will likely become the first – and potentially only – pension fund to pay a new form of levy being introduced by the PPF this year.
The lifeboat fund is currently consulting on a new form of levy for funds without a “substantive” sponsoring employer – such as the new BHS scheme. The consultation closes on Monday 6 March.
According to the PPF, schemes without sponsors “will always pose a higher risk than an otherwise identical scheme with a continuing sponsor, however weak”.
The new levy – which is linked to equity market put option pricing – will cover any scheme set up between 1 January 2017 and 31 March 2018.
The UK government last week published a wide-ranging discussion paper covering the defined benefit sector, prompted in part by the high-profile BHS case.
One element of the paper focused on how to improve the handling of pension schemes with distressed sponsors before bankruptcy becomes imminent. The government wants to explore ways of allowing more schemes to operate independently of their sponsors to avoid pension deficits pulling companies into bankruptcy.
Despite the temporary nature of the proposed levy, David Taylor, the PPF’s general counsel said in the consultation that “we do not rule out developing our approach to apply to a wider range of schemes in the future”.
A small number of pension funds have successfully separated from their sponsoring employer in the past: Trafalgar House now provides third party administration services for other funds after spinning off from its engineering parent company in 2006. Photography company Kodak’s pension scheme put in place a similar arrangement, known as a “regulated apportionment agreement”, in 2012 when its parent company filed for bankruptcy in the US.
BHS settlement reaction
While TPR chief executive Lesley Titcomb called the settlement with Sir Philip Green “a strong outcome”, other industry commentators have been less positive. The regulator is seen as having settled for a lesser amount in order to avoid a court battle, according to several people.
David Everett, partner at consultant LCP, pointed out that a de-risking plan had been discussed before BHS’ sale in 2015 which would have been similar to the arrangement finalised this week – and it would have cost Sir Philip much less.
“The winners in all this are the PPF, which is not having to take on two underfunded schemes, and a handful of former BHS employees for whom the PPF’s compensation cap would have bitten very harshly,” Everett added.
Darren Redmayne, CEO of Lincoln Pensions, a specialist in covenant advice, said: “While [the BHS settlement] may suggest a ‘third way’, whereby employers can shed their schemes without paying the full buyout liability, in practice the barriers remain high – you only have to look at the select committee investigation, regulatory process and reputational damage Philip Green has suffered, to see this isn’t a path that companies will readily choose unless they absolutely have no other option.”
In future, Redmayne added, there were likely to be more sponsorless or “zombie” schemes due to more employers struggling to fund deficits.
“As such, it will be for the ‘greater good’ that compromises will be struck,” he said. “These situations remain relatively rare but as the full scale of the defined-benefit deficits issue works through the system in the coming years we will likely see such settlements on a more regular basis.”
Rory Murphy, chairman of the Merchant Navy Officers’ Pension Fund, said: “Everyone appears to have won to some degree in this game of high-stakes poker. Each player could have played their hand for more in this negotiation but would have risked losing more – as such, this looks like a decent result for all concerned.”
Murphy also questioned the need for greater powers for TPR, which was being discussed in the government’s green paper. He said: “Given TPR with its existing powers can achieve this result, why is there a need to increase them?”