Hugh Nolan believes the ongoing BHS story demonstrates some positives for the industry.
While there are clearly lessons to be learned from the BHS case, it seems to me that it also illustrates many strengths of our excellent UK pension system that have largely gone unnoticed in this debate.
Firstly, pension scheme assets in the UK are of course segregated from the employer's monies so that even when a sponsoring company like BHS goes bust the pension scheme still has its own funds.
The BHS Scheme has well over £400m that has been protected from insolvency by this segregation. These assets are carefully managed by trustees with a fiduciary duty to act in the best interests of the members and under their stewardship the BHS Scheme assets grew by over £90m in the three years to 31 March 2015 (the last published accounts for the scheme).
The BHS Scheme disclosed a surplus in 2008 but was then hit by the credit crunch. Unsurprisingly BHS were apparently unable to fill the consequent funding deficit for their sizeable legacy scheme without a long recovery period but the trustees did secure a substantial increase in contributions from £5.5m in 2008 to £10m per annum from 2010 onwards.
I suppose it is possible that BHS could have paid even more but they didn't pay any dividends to shareholders since 2004 and have gone bust, so it certainly seems reasonable for the trustees to think they had got the highest contributions possible.
We then hit the very unfortunate situation where BHS fails, with 11,000 jobs at risk along with over 20,000 pensions. The BHS Scheme has less than half the money it would need to secure all the promised benefits with an insurance company so pensioners face a massive loss compared to their full entitlements.
Pension Protection Fund
This is where the Pension Protection Fund (PPF) comes in. The PPF exists to protect members in situations like this and has been managed prudently enough to amass reserves of £3.6bn, allowing it to boost pensions for BHS members dramatically without a significant strain on its own financial position. I doubt if we could afford to be at all sanguine if we were in a similar situation with the Pension Benefit Guaranty Corporation in the US and their deficit of $20bn, so well done to the PPF!
Finally, we should recognise that despite the regrettable fall in benefits to the protected PPF level, members of the BHS Scheme had accumulated a pension of broadly 1/60th of their salary for each year of service.
With the current level of interest rates and longevity, the value of this benefit is massively more than anyone anticipated at the time and has been largely met by the employer, who has contributed far more than the members themselves over the years. Even the reduced benefits payable in the PPF represent a fantastic return compared to the contributions paid by members.
I have every sympathy with the shop workers who have lost their jobs and those who will not get their full pensions and we must not be complacent. I'm equally sure that the Regulator, the Select Committee and others will identify improvements to the system, as well as any malfeasance that may have taken place.
However, I think it is important to recognise the positive aspects of the protection in place and the fact that many of the affected pensioners will still have a large degree of financial security in retirement, even if not quite as much as they had hoped and expected.
Hugh Nolan is director at Spence and Partners and president, Society of Pension Professionals
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