UK Pensions Regulator's new tougher approach following BHS
BHS Ltd (“BHS”) was a well know British high street retailer, employing 11,000 staff, and owned by Sir Philip Green (“PG”). BHS operated two defined benefit pension schemes. BHS (the sponsoring employer of the BHS Pension Scheme and BHS Senior Management Scheme) went into administration in April 2016, triggering the start of a Pension Protection Fund (“PPF”) assessment period for both schemes.
In February 2017 the UK Pensions Regulator (the “PR”) announced that it had reached a settlement with PG that led to regulatory action which had been commenced in the context of the assessment being discontinued against him and his associated companies. An agreement was reached between PR and PG whereby PG agreed to pay up to £363m to fund the scheme rescue and members of the existing schemes were given the option to:
remain in the current scheme (which would ultimately transfer to the PPF);
transfer to a new scheme with benefits above the PPF level but with reduced post retirement increases; or
opt to receive a lump sum if they had a small pension of up to £18,000 in value.
This settlement was intended to ensure that benefits were reduced, but without the full reduction that would follow from a transfer to the PPF (a statutory fund, which pays compensation at a prescribed level to members of defined-benefit schemes that are eligible for entry (a scheme may be eligible if its sponsoring employer has experienced an insolvency event and the scheme is underfunded to a specified level)).
The circumstances leading to the administration of BHS were widely publicised and scrutinised, leading to the Work and Pensions Committee of the House of Commons starting an investigation into the affair and the prospects for the schemes' members. The investigation criticised the PR for being reactive, slow-moving and reluctant to exercise its powers. Following this, the PR published a regulatory intervention report outlining its involvement in the schemes and highlighting several lessons it has learnt from the situation, concluding that it would use its powers more frequently and quickly in future.
A. Scheme funding and valuations
Key points noted by the PR in its report (which is perhaps indicative of the manner in which the PR will approach future cases) are:
Speed: The PR acknowledges that it "could have been quicker and more proactive by engaging with the trustees without waiting for all internal reviews to be completed given the significant weakening of covenant and the very long recovery plan that was submitted".
Funding and valuation matters: The PR notes that the schemes underwent several valuation cycles and that this could have been improved by focus on "the timeliness of [its] engagement and the clarity of [its] communications". The PR emphasises that it needs to set out clearly and robustly its expectations to pension trustees and sponsoring employers in cases where the affordability of deficit repair contributions is an issue for the employer (in the case of BHS the deficit was £571m). Further the PR will be much faster to take action where the funding plan submitted is late or inadequate, particularly if the plan allows more than 10 years to clear the deficit. The PR can impose funding plans on employers, and has recently issued its first notice to an employer warning of its intention to use this power, as well as confirming that other potential cases are in the pipeline. Under the section 231 Pensions Act 2004 (“PA”) the PR has the ability to modify future benefit accrual by active members; direct how trustees should calculate the technical provisions; direct the period over which trustees should remedy a failure to meet the statutory funding objective and impose a schedule of contributions.
Information gathering: The report focuses on the "unprecedented" use of the PR’s s 72 PA information gathering powers pursuant to which notices were issued against the main parties involved, as well as their professional advisers, connected parties and "banking and financial entities and individuals". The PR highlights the importance of this power and that “tactics that we suspect are being used to delay or impede an investigation will be dealt with robustly” (failure to comply with a Section 72 request is a criminal offence).
Additional steps: Finally, in order to promote the PR’s statutory objectives (being the need to protect members’ benefits and to protect the PPF) the PR will take steps to:
secure additional funding from the Department for Work and Pensions to address challenges across a number of areas including increasing the frontline resources to undertake higher volumes of casework more quickly and proactively;
work more efficiently in a more outcome-focused manner and communicate more clearly and effectively;
increase the number of proactive funding cases in order to influence the outcome in advance of valuations being agreed and submitted; and
recruit additional staff to PR case teams in support of this proactive casework approach.
B. Avoidance investigations
The PR has emphasised that it will not hesitate to investigate, where appropriate, when it suspects that action has been taken to weaken the position of a defined benefit pension scheme. Further, it has said that it is committed to using its statutory powers more often where it believes there is avoidance activity (also known as its "moral hazard" powers which the PR is entitled to enforce in order to limit claims on the PPF).
The Regulator's moral hazard powers allow it to require extra funds from employers or directors by way of contribution notices, financial support directions (“FSDs”) if such persons have been party to an act or omission that increases the risk of members not receiving their benefits in full. These powers can cover a wide range of scenarios including prioritising dividend payments over pension contributions, or entering into corporate transactions or re-financings which leave the pension scheme reliant on a weaker employer or in a weaker position if the employer goes bust.
The PR has reiterated that it “takes potential avoidance activity very seriously and recognises the importance of its intervention as a deterrent and to seek redress for members and the PPF”.