January 30
Are the BHS pension schemes going to get sorted?

Over the weekend Sky News reported that Sir Philip Green and the Pensions Regulator are nearing a deal on the BHS pension schemes, some seven months after Sir Philip Green told the Work and Pensions Select Committee that he would "sort" the situation. It appears that the deal could involve a payment of more than £350m, up from the £250m which was reportedly being offered just before the Pensions Regulator issued its warning notices in November.

As ever with the BHS pensions saga, Frank Field MP, Chair of the Work and Pensions Select Committee, is keeping a close eye on developments. He has already said that if a deal is reached he expects to call Sir Philip Green and Lesley Titcomb (Chief Executive of the Pensions Regulator) back to the Committee to justify the settlement and its impact on members of the BHS schemes.

This adds an intriguing extra dimension to the deal. The parties involved are likely to be mindful of how any deal will be portrayed in the tabloid press. Frank Field has made it clear that he will be looking at whether members are getting the pensions they had been promised.

Even a cash payment of £350m will not be sufficient to allow the schemes to be wound up with full benefits paid to all members by an insurer - it appears that more than £700m would be needed to achieve this outcome. However, I would speculate that there are ways the deal could be structured to avoid a backlash from the tabloids.

Firstly the smaller pensions (of which the BHS schemes have relatively many, due to the nature of the business) will presumably be paid out in lump sums, which reduces the liabilities of the schemes.

The real key driver though is structuring the deal in such a way that a wind-up of the pension schemes can be avoided. This means that the £700m wind-up deficit does not come into play.

One option for achieving this could be for a company under Sir Philip Green's control to provide some form of ongoing support for the pension schemes. This need not be full ongoing support; a limited guarantee might be sufficient.

Alternatively the lump sum payment could be sufficiently large to allow the BHS schemes to stay out of the PPF. This would require the schemes to have enough assets to be able to pay a level of benefits which exceeds PPF compensation, while adopting a low risk investment strategy. This is the outcome which the Trustees of the British Steel Pension Scheme are hoping to achieve for their members. A key hurdle is that a deal of this nature would require the agreement of the Pensions Regulator and the PPF.

Both of the above options might involve members getting a lower level of pension increases in future than they were originally promised through the BHS schemes, perhaps through being transferred to a new scheme. For the assets to be sufficient to pay the promised level of benefits, pension increases may need to be reduced to a level above PPF compensation, but less than the original level.

Future pension increases can be very expensive for a pension scheme to provide, but are often not as highly valued by members. If the deal reached can achieve an outcome which involves members receiving lower future increases but no immediate reduction to their pension (unlike the 10% haircut which would be experienced by non-pensioners if they were to enter the PPF), might this be considered an acceptable outcome by Frank Field? And will he have a view on whether it is appropriate to give members with small pensions a lump sum, instead of their pension?

With suggestions that a deal could be reached as soon as this week, we await further details with interest.


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