Select committee: Scare negligent employers into funding with 'nuclear' fines

The select committee's publication released today is the result of a lengthy and often-heated inquiry into the collapse of BHS and the stranding of its pension scheme, and makes recommendations designed to combat the “extended limbo” suffered by members whose sponsor falls foul of current anti-avoidance powers.

The committee hopes its findings will be considered and developed in the Department for Work and Pensions' green paper on DB, expected this winter.

Those could be things that put people off lending to companies that are DB pension sponsors

Mark Smith, Taylor Wessing

Included in those recommendations are powers for trustees, subject to the approval of the Pensions Regulator, to consolidate small schemes into an aggregator fund managed by the Pension Protection Fund, in an attempt to boost scale in the DB economy.

It also urged the DWP to consult on allowing changes to indexation of benefits to ease the strain on struggling schemes, with the expectation that there would be a return to the original benefit level if conditions improve.

Prevent another BHS

The committee, led by Labour MP Frank Field, was quick to target negligent sponsoring employers, embodied by the vilified Philip Green, and argued that such employers are able to meet their pension obligations.

Securing PPF-level benefits for the members of the BHS Pension Scheme would currently require around £350m to be injected into the scheme.

In a statement introducing the report, Field 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 £1bn, rather than £350m. He would have sorted the pension scheme long ago.”

TPR could be strengthened

The regulator also found itself in the firing line, both for the time taken to address the BHS scheme’s plight and for allowing long recovery plans, which have become more common since the 2008 financial crisis.

“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,” said Field.

Source: The Pensions Regulator

Schemes would also be required to submit actuarial valuations to the regulator within nine months under the recommendations.

To further bolster this tough regulatory regime, seeking clearance would become mandatory in situations where there is a material risk of detriment to the scheme, an addition that the committee said would avoid repeats of the BHS scandal.

In response, Lesley Titcomb, chief executive of the regulator, said it welcomed the committee’s recognition of the importance of “robust and proportionate regulation”, and would consider the proposals.

Unintended consequences for employers

But Mark Smith, pensions partner at law firm Taylor Wessing, warned that the committee’s well-intentioned recommendations could have unintended consequences.

Commenting on the potential for fines to be levied and the shortening of recovery periods, he said: “Both of those could be things that put people off lending to companies that are DB pension sponsors.”

If corporate sponsors are unable to secure credit, then the proposals mooted by the committee would only accelerate the trend of DB-related insolvencies.

Giving trustees power over indexation

In recommending that schemes under stress be allowed to modify the indexation of benefits, the committee has waded into a long-running debate over the ‘rules lottery’ brought about by the decision to ditch the retail price index as the statutory minimum for pension increases.

But Ben Roach, partner at consultancy Barnett Waddingham, explained that many schemes are stuck with far more onerous obligations than RPI, including 5 per cent increases implemented for simplicity.

“The cost of such schemes has increased substantially, with these increases running at roughly double the level of inflation in recent years,” he said.

Roach said that risks would be incurred by the proposed practice, but that it represented a better alternative than entry of a scheme into the PPF.

“With strict controls, this appears to be an option worth exploring. Nevertheless, trustees will need to act in the best interest of members, and it should not be a decision that they take lightly,” he said.

The recommendation does seem to counter the rhetoric offered by pensions minister Richard Harrington, who previously said: “We can't have people thinking they've been fiddled.”

The DWP declined to speculate on the content of its green paper, but will formally respond to the recommendations in due course.

PPF put forward to handle aggregated small schemes

The MPs’ report also contains a suggestion that the much-vaunted consolidation of small schemes could be achieved under the management of the PPF, in an aggregator fund.

Joanne Segars, chief executive of the Pensions and Lifetime Savings Association, welcomed the support for consolidation, and said the PLSA would publish its own recommendations in March.

“As the committee recognises, creating consolidators is a complex task where the details matter. We are actively investigating the pros and cons of the spectrum of consolidation options including an aggregator fund.”

The aggregator fund model also received a cautious welcome from its prospective manager. A PPF spokesperson said: “We agree that there is scope for scheme consolidation to bring economies of scale in terms of investment and administration, if the barriers to consolidation can be overcome.”

The spokesperson added: “It is ultimately up to government to determine how this might work, but we are encouraged that the committee believes the PPF to be the obvious vehicle for this.”