POLITICAL STAGE Slugging it out

The BHS squabble descends into a brawl as the two main players exchange verbal blows, reports Ceri Jones, financial journalist

The BHS squabble descends into a brawl as the two main players exchange verbal blows, reports Ceri Jones, financial journalist

The latest episode in the BHS saga has Sir Philip Green demanding that Dominic Chappell pay into the BHS pension deal as part of any settlement, with the two blaming each other for the retailer’s collapse.

Chappell received payments of up to £25m in the 13 months he owned the chain, while Green and family shareholders took some £585m in dividends from the firm during their 15-year ownership.

The Pensions Regulator has commenced legal proceedings and is understood to be seeking around £350m from Green and as much as £17m from Chappell.

However, it is understood that negotiations have taken place between Green and the Regulator with the intent of reaching a settlement before the Regulator proceeds to the next stage.

Chappell meanwhile has alleged that Green failed to support a deal he had agreed in principle with the Regulator and the Pension Protection Fund (PPF) to restructure the fund before BHS collapsed, which involved a £127m contribution from Green, and the PPF taking a 30% stake in the retailer.

The scheme is currently in the PPF assessment period and members are being paid at PPF levels of compensation.

We have also learned that the Regulator has incurred external costs of at least £1.4m from its investigation into BHS, of which nearly £400,000 is in legal expenditure, while internal costs are also racking up, with 16 staff working on the probe.

The Work and Pensions Committee examining the situation has since issued an 84-page report criticising the “reactive and slow-moving” Pensions Regulator and its decision to allow a 23-year deficit recovery plan for BHS in the first place. It calls for the Regulator’s powers to be beefed up to include fines three times greater than those currently used as deterrent.

Under these new powers, the Regulator could demand that Green pay around £1bn.

MPs also recommended that takeovers of companies with substantial pension deficits should require mandatory clearance from the Regulator, to allow moral hazard issues to be tackled earlier on.

Scant consolation

*BHS employees may at least like to know that Sir Philip Green cancelled his annual New Year’s holiday to the lavish Sandy Lane resort in Barbados, a break he has taken every year for the past 20 years. He is usually joined by stars, including Simon Cowell, Kate Moss, Rod Stewart and Rihanna, but celebrities are said to have abandoned him following the BHS publicity.

Don’t underestimate the public’s ignorance

Did anyone else notice the slating of former pensions minister Dr Ros Altmann in a recent Daily Express article about the current rise in transfers from defined benefit (DB) schemes? Maybe it is something to do with the kind of people who are minded to add comments to online newspaper articles on New Year’s Eve, a time when most of us would rather be celebrating with family and friends. At any rate, the comments were vicious – the kind of thing that would deter anyone from a life in the public eye.

The article explained that several FTSE 100 executives, and Baroness Altmann herself, have taken DB transfers recently, as gilt yields have been low and cash values unusually attractive, along the lines of a similar story that appeared earlier in the Financial Times. Baroness Altmann cashed in two of her final salary pensions after transfer quotes for both doubled over a two-year period. She explains how this situation came about and why transfers currently represent good value.

We know that the public generally distrust the pensions industry, but the ignorance shown by readers was extreme.

Stunningly, one said: “I wouldn’t listen to her if she were the last woman on earth. Her advice about pensions should not be listened to. Find someone who knows what they’re talking about.”

Another said: “If the experts suggest it, you can be certain it’s a con with a catch in it, and I wouldn’t trust Altmann as far as I could throw her.”

It would be impossible to miss the point more completely.

Call to change DB valuation basis

Companies could be misallocating cash in their businesses because the way in which pension obligations are valued is outdated, according to a former Regulator.

Michael O’Higgins, who was chair of the Pensions Regulator from 2011–14, has called for a more appropriate method of assessing scheme liabilities to prevent companies from allocating money to apparently underfunded schemes when it could be better spent investing in their business.

Mr O’Higgins, who now chairs the £12bn Local Pensions Partnership, said that using gilts and corporate bonds to calculate liabilities had been shown to be a flawed measure at a time when yields on these assets were driven down by the Bank of England’s monetary policy. He said that this probably causes significant misallocation of resources to pension schemes rather than to reinvestment in the business, and is also inhibiting merger and acquisitions activity, either through concerns about the size of liabilities or fear of regulatory action. He added that, irrespective of our place in the EU, UK plc needs to free resources for investment to boost its productivity.

Mr O’Higgins said that a more “sensible approach” would be for schemes to assess liabilities based on the actual expected yield on the assets held, such as equities or property.

Pensions minister Richard Harrington has added his ha’porth to the debate by suggesting that pension schemes might invest more in higher yielding assets, such as residential rental real estate, and that the government might nudge the industry in this direction by encouraging consolidation in the same way it has done with local authority pension funds.

The debate has been spurred by the government’s Green Paper on the sustainability of DB schemes, which should be published in a few weeks.

Regulator applies pressure on trustee standards

The Regulator plans to be more demanding about trustee standards, with targeted education and tougher enforcement over the course of 2017.

Its consultation paper on 21st century trusteeship elicited 74 responses, which mostly called for targeted action from the Regulator towards sub-par schemes, rather than increasing the compliance burden for all.

The Regulator plans to introduce a tailored education programme this spring and to improve its website to clarify what standards are expected of professional trustees and chairs. There will be tougher enforcement action against trustees who do not live up to these standards, such as the appointment of an independent trustee or professional person, improvement notices and the suspension or banning of an individual.

Lay trustees and chairs will not have to obtain formal professional qualifications, but the Regulator is keen to look at effective ways of driving up standards. The role of trustees has evolved over time and the issues are increasingly sophisticated, so this can be seen as a move to ensure that trustees keep up with events and to encourage consolidation where appropriate.

The Regulator plans to further support lay trustees through the development of the Trustee Toolkit and self-help tools. It is also considering steps to encourage employers to support lay trustees in their work, such as giving them time off to prepare and additional training.

Since April 2016, trustees of defined contribution schemes have had to comply with more rigorous governance standards, such as the appointment of a chair, new reporting requirements and, controversially, a duty to ensure value for money in the provision of default funds, including transaction costs and charges – something that is still causing consternation as “value for money” has not been defined.

Some schemes that have not completed returns or submitted a chair’s statement on time have already been fined.

In Brief

UK’s "apartheid" under fire from OECD

The UK has been singled out for operating the largest gap between public and private sector pension provision in the developed world.

The Organisation for Economic Co-operation and Development (OECD) found that the UK is the only country where civil servants and other public sector employees enjoy pensions worth more than their final salary. In contrast, a private sector worker can expect a pay cut of nearly 50% at retirement, assuming that they finish work at age 68, and based on minimum auto-enrolment contributions of 8% of salary.

This 50 percentage point gap in replacement income between civil servants and private sector employees is more than twice the average across all OECD countries, where the difference is 20 percentage points.

The OECD called on the UK government to address the inequality, but in fact it has cut back on private pension tax breaks and shows no sign yet of raising auto-enrolment contributions.

In the autumn of 2015, the government floated an idea which enraged public sector unions, which was to move employees with final salary pensions into a separate tax regime, where they would lose some tax benefits compared with other savers.

Diageo dispute splits unions

The dispute about the closure of Diageo’s final salary scheme continues to rumble on after the drinks maker’s majority trade union, GMB Scotland, agreed to a deal, but members of Unite rejected it. Both unions agreed to strike last month, but a deal was subsequently brokered with GMB after Acas was brought in. While the GMB members have accepted the proposal, the smaller trade union Unite is yet to clarify its position.

Diageo, the maker of Johnnie Walker whisky, has been consulting with employees and the unions since February last year as part of a review of its pension scheme.

The group made a decision to end its final salary scheme, stating that it is an escalating cost for only a small part of the overall workforce – in fact one third of employees are in the plan. The scheme closed to new members in 2005.

A Diageo spokesperson said that the firm had invested £1.1bn in the final salary scheme over and above its basic employer contributions in the last decade.

 

Ceri Jones is an award winning financial journalist. She has edited several publications including the Investors Chronicle, Financial Adviser and Pensions Management.