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"Nuclear deterrent" to avoiding pension responsibilities needed, says Committee

21 December 2016

The Work and Pensions Committee report calls for Government to consult on new enforcement powers for The Pension Regulator (TPR) to impose punitive fines that could treble the amount payable. It is expected that such a fine would never need to be levied in practice, as it would act as such a strong deterrent to avoiding pension responsibilities.

Inquiry background and Committee recommendations

This inquiry followed up on the Committee's report into the collapse of BHS, and proposes an initial set of measures Government should consult on with a view to reducing the chances of a BHS pension fund style disaster occurring again. In the case of BHS, TPR has reportedly asked for £350 million contribution to the pension deficit: under the proposed new powers that would equate to the threat of a charge of up to £1 billion.

Regulatory intervention is often clunky and concentrated at stages when a scheme is in severe distress or has already collapsed. The Committee recommends TPR be reformed to a nimbler, more proactive regulator that could intervene sooner when difficulties in a company pension fund become apparent, and before problems begin to compound.

TPR intervention

TPR should never again, as it did in the case of BHS, take two years to intervene in a negotiation concluding with a 23 year deficit recovery plan:

  • the timetable for valuations should be flexible—shorter or longer—to reflect the riskiness of schemes;
  • the statutory timescale for the submission of valuations and recovery plans should be reduced to nine months, though TPR should intervene sooner where it has concerns; and
  • recovery plans of more than ten years should be exceptional
  • the Government should consult on new rules for situations where TPR clearance of major corporate transactions is  mandatory rather than voluntary, allowing the TPR to decide if a particular proposed corporate change could damage a pension scheme

New powers for pension fund trustees

The report recommends new powers for pension fund trustees to take decisions in the interests of scheme members, including:

  • being able to negotiate restructurings that result in better than PPF outcomes for schemes facing crisis
  • being able to introduce flexibility to indexation to make schemes more sustainable
  • being able to consolidate smaller schemes into a new statutory PPF-managed fund to take advantages of economies of scale

The Committee also says the risk-based levy charged by the Pension Protection Fund (PPF), the insurance "lifeboat" for collapsed pension funds, should be recalculated to incentivise good corporate behaviour, and avoid the "moral hazard" of irresponsible companies ducking their pension liabilities at the expense of good corporate citizens.

The levy should be improved regularly to reflect risk accurately, and PPF should consult on a means of adjusting the calculation of the levy to:

  • incentivise key aspects of good scheme governance
  • ensure particular types of employer, including SMEs and mutual societies, are not unfairly disadvantaged

The case of BHS under Committee proposals

Under the Committee's proposals:

  • the BHS trustees would have been empowered to demand timely information from the uncooperative sponsor and may have been able, through a streamlined restructuring process or adjustments to indexation, to make the scheme more sustainable while securing better than PPF outcomes for members
  • many scheme members may have taken their pensions as lump sums under more flexible rules, to their benefit and to that of the schemes
  • TPR would have intervened more actively in the 2009 and 2012 valuations, requiring concessions from Sir Philip, abridging the valuation schedule and never allowing a 23 year deficit recovery plan to be considered as a serious proposal
  • Sir Philip would have faced far stronger incentives to "sort" the pension scheme during his ownership owing to the nuclear deterrent of a potential punitive anti-avoidance fine that could treble the amount TPR could recover from him

Chair's comment

Rt Hon Frank Field MP, Chair of the Committee, said:

"It is difficult to imagine the Pensions Regulator would still be having to negotiate with Sir Philip Green if he had been facing a bill of £1 billion, rather than £350 million. He would have sorted the pension scheme long ago.

The measures we set out in this report are intended to reduce the chance of another scheme going down the BHS route. We hope and expect that we will never again see a company like BHS be able to come up with a 23 year recovery plan for its pension fund, and certainly not that it would take the Regulator two years to really begin to do anything about it.

It is further inconceivable that Sir Philip Green's deal to dispose of BHS and its giant pension deficit for £1 to a dismally unqualified man, with no plan for the pension schemes and no means of financing one, would have evaded or passed any mandatory clearance scheme. To prevent another BHS we need to have the means to nip inevitable disasters like this one in the bud. We hope the Government will consult on the package of measures we propose, which would go a long way, without resorting to any new reams of red tape, towards doing just that.

It will sadly be of no comfort to the 20,000 BHS pensioners facing cuts to their promised pensions, but had just some of these measures been in place they might never have ended up in that situation."

Further information

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