Protecting Pensions

The current pensions regulatory structure is vulnerable

On 2 June 2016, the administrator Duff & Phelps announced that attempts to save BHS as a going concern had failed. All 164 stores are planning to close with the loss of 11,000 jobs. It is the most significant corporate failure in the UK's retail sector since the collapse of Woolworths in 2008. The brand that had been present on the nation's high streets since 1927 will now disappear, although more recently the company's 70 overseas stores have found a buyer in Qatari group, Al Mana.

There are a number of factors that make the failure of BHS particularly noteworthy. Central to discussions is the role of former owners Sir Philip Green's Arcadia Group and Dominic Chappell, and BHS's defined benefit (DB) pension scheme, which has been left with a deficit of £571 million.

Insolvency event

When BHS proposed a Company Voluntary Agreement in March, it triggered an 'insolvency event' − the first stage in having its pension scheme's liabilities taken over by the Pension Protection Fund (PPF).

As the employer's business will not now be transferred to another employer, and the scheme's assets are not adequate to permit a full buy-out of all existing liabilities, responsibility for paying existing and future liabilities will now be transferred to the PPF.

For members, the implications for the security of their benefits will vary. Those who are already receiving pension payments and who are over the scheme's normal pension age will generally continue to be paid their pensions in full, although annual inflation-linked increases will only be paid in respect of benefits accrued since 1997.

However, for those who have yet to retire or who have retired early, restrictions can apply. In such cases, 90% of accrued benefits will be payable, subject to an overall annual cap set at £33,678.38. Again, inflation-linked indexation will only apply to those benefits that have accrued since 1997.

Although absorbing the liabilities of the BHS scheme will have a significant impact on the PPF, it will not affect its viability. The PPF has assets in excess of £20 billion, which represents 115% of the funds required to meet existing liabilities. BHS would represent the sixth or seventh largest deficit to be addressed by the PPF. However, the extent to which the PPF would absorb the current deficit remains unclear.

Statutory responsibility

Under the provisions of the 2004 Pensions Act, the Pensions Regulator (tPR) has a...