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How can retail plug the pensions black hole?

Sir Philip Green has settled the BHS pension deficit, but what does this mean for the rest of retail?  

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The latest chapter of the BHS pension scandal drew to a close earlier this month, after the chain’s former owner, Sir Philip Green, agreed to pay a voluntary contribution of up to £363m into the stricken fund, which is in deficit to the tune of £571m. Green is also significantly increasing contributions to the Arcadia Group’s pension fund, in a bid to tackle its deficit.

However, the BHS scandal has put the spotlight firmly on the health of many defined-benefit (DB) – also known as “final salary” –pension schemes, in retail and other sectors. The Pensions Regulator has vowed to crack down on more cases in its wake.

The recent referrals of some high-profile firms, such as food company Bernard Matthews, to the Pensions Protection Fund (PPF) have piled on the pressure, and the parliament’s work and pensions committee says it has “considerable concerns” about the wider DB pensions sector.

DB pension plans, which promise an employee a specific payment or lump sum when they retire, were once popular in the private sector but are increasingly falling out of favour as costs spiral. Many businesses, including Marks & Spencer and the Royal Mail, have closed their DB schemes to future accruals. Most have moved to defined-contribution schemes, under which an employer and employee agree on a set amount.

Many of the DB pension schemes still in existence are in deficit. For example, John Lewis’s total pension deficit stands at about £1bn, higher than the £940m shortfall recorded at the end of January. The deficit is expected to be met by investment returns on the scheme’s assets, but the retailer has also said its pension operating costs will be about £30m higher for the next financial year.

“If a DB scheme is in deficit (which most of them are), the employer has to divert resources from paying dividends or investing in the company’s future to [cancel] the deficit,” explains David Blake, director of the Pensions Institute.

“The government believes most companies can afford to do this, since last year companies collectively paid out five times more in dividends than they paid to remove pension deficits. But around 1,000 schemes are in such trouble that the employer is likely to go bust over the next five to 10 years. Those pension schemes could go into the PPF. The best thing to do would be for companies to remove the deficit in their schemes (if they can) and then do a buy-out – ie, get an insurance company to take the liability off the company’s balance sheet in exchange for a buy-out premium equal to the value of the scheme’s assets.”

The PPF was set up in 2005 to provide a lifeboat for collapsed pension schemes, and is funded by a compulsory levy on eligible pension schemes.

“DB schemes have been subject to an increase in regulation over funding and how much employers put in,” pensions barrister Ruth Bamforth tells Drapers. “Before the PPF was introduced, if a business went bust, employees could lose most of what they were expecting to receive. The PPF doesn’t mirror the benefits, but it provides a good level of protection.”

Jon Hatchett, head of corporate consulting at actuary Hymans Robertson, warns that many companies will be “even less willing” to divert money into their schemes to plug deficits in 2017, as the pressure on margins increases. “Rightly or wrongly, the focus of corporates will be on improving profitability, seeking growth opportunities and protecting earnings.”

The sorry tale of BHS has shone a light on the pensions problem. The Department for Work and Pensions argued that the crisis could have been averted if the Pensions Regulator had been more assertive and pro-active. In response, the regulator pledged to pursue more cases (see box). MPs have also called for it to be reformed and given much stronger powers, including the “nuclear” option of imposing punitive fines that could treble the amount payable towards covering a pension deficit. That power would have left Green facing a bill of £1bn.

The Department for Work and Pensions is consulting on a green paper launched in February until mid-May 2017. The government argues that, despite the concerns, there is not a fundamental problem with the system, but recognises that confidence in the sector has been undermined.

“BHS was a high-profile collapse,” adds Bamforth. “The DWP is asking whether pension law is working. The government responded by launching a consultation, but it doesn’t think a punitive fine is the way forward.”

Although the lasting impact of the BHS pensions scandal has yet to be determined – especially as the Pensions Regulator was still pursuing former BHS owner Dominic Chappell for a contribution to the collapsed retailer’s deficit as Drapers went to press – it has thrust the problems facing some businesses under the microscope. A clearer and fairer system could be within reach.

The problems

The ageing population

Life expectancy is rising, adding £135bn to pension scheme liabilities across all sectors.

Interest rates have gone down

Pension schemes invest over long periods, so even small changes in long-term investment returns have a big impact on the amount of money they need to hold on to today.


The vote to leave the European Union has also led to a fall in long-term interest rates, which have hit record lows. This has resulted in the value placed on liabilities rising quickly and deficits widening further.


Changes in pension legislation and regulations have added benefits and guarantees for members, and added to the cost of providing pension benefits.

Source: JLT Employee Benefits: How do we get out of this pensions black hole?


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