The Labour Governments responsible for the Government of Britain between 1997 and 2005 were responsible for a lot of things. One of those things was a linguistic creativity which was admired by some but deplored by most. It was a Labour Government which was responsible for terms such as “sustainable growth” (a term which is essentially meaningless but which, as Clive James observed in 2011, seemed to promise a sense of responsibility). It gave us the term “quantitative easing”, a term meant to disguise the business of putting money into the economy so as to deflect the effects of an economic crisis and, in 2009, it coined the term “reputational damage”. At least that last term, unlike most of all the other terms Labour coined, could be decoded without too much difficulty.
Lately and partly because of pensions, other individuals and institutions have suffered reputational damage and other more serious sorts of damage. Pensions News (PN) has been interested by the volume of articles and comment (some of the comment in said articles) about the demise of British Home Stores (BHS) and, in particular, the predicament the pension scheme of that penurious company now finds itself in.
For the small number (surely) of the large number of his readers who have not yet had the time to read through their copies of “Pensions Expert”, “Occupational Pensions” or “Pensions World”, PN will tell you that the BHS pension scheme has a large deficit. PN will go on to tell you that that deficit has been estimated at £571m and that the deficit arises because of the way the pension scheme, like all occupational pension schemes which provide benefits on a salary-related basis, functions. PN will understand if you, the reader, wish to tune out for the next sentence or so. For the more technically minded, essentially, the scheme deficit arises because the cost of providing members with pensions is higher (£571m higher in fact) than the value of the assets in the scheme.
As he writes, PN is considering adding his groats-worth of comment to the mountain of comment which has been made by many pensions commentators and academics; some of them illustrious and some of them less so. While he considers this, PN will state that he was interested to read (in the Financial Times (FT)) that the relevant select committee to be set up by the Government will probably not be calling on Lady Green, wife of Sir Philip Green, to answer their questions. Apparently, Sir Philip is capable of answering the committee’s questions alone. It seems that those questions will revolve around the amount of money taken out of the BHS business whilst it formed part of the Arcadia group (under the Greens’ ownership). From a pensions’ perspective, the term “taken out of the business” can also be read to mean “and so not put money into the pension scheme”. This, arguably, is one of the questions the committee will not be asking Lady Green but it will ask Sir Philip. He could then be asked the same question all over again by the pensions regulator (TPR). PN is confident that, if they were around still, the Labour Government would state that Sir Philip and Lady Green’s actions in respect of BHS have caused them to suffer reputational damage.
Some commentators have asked what TPR was doing when BHS was busy getting itself into financial difficulty and have indicated that this institution too has suffered reputational damage by not acting quickly enough or at all. Someone should say something for TPR so let PN be the one. It seems that, in much the same way as the allies were doing in 1940 as Hitler’s armies marched through the Ardennes, TPR may have been looking the other way. TPR’s chief executive, Ms Lesley Titcomb, has already gone on record as stating that TPR’s concerns were aroused in 2012 when it (I mean BHS - not TPR) put a plan to its pension scheme trustees which involved making up the (then) deficit over a period of 23 years. Ms Titcomb went on to state that TPR had not accepted this “recovery plan” and that it (I mean TPR now – not BHS) opened an investigation. Very properly, TPR opened an investigation into the scheme – not the Arcadia group (hence PN’s WWII analogy). TPR must have been more concerned when, amidst conversations with BHS’s owners about a shorter recovery plan, the BHS business was sold for £1. This, said Ms Titcomb, came as news to TPR and, in March 2015, TPR set up an “anti-avoidance” investigation. This investigation is due to report at the end of 2016. The fact that the investigation is ongoing may explain why TPR has rejected an offer from Mr Green to inject a mixture of cash and assets into the BHS scheme. The value of this package has been quoted as being £80m however PN should state that this figure has been disputed.
The collapse of BHS was a problem to its employees, its customers and its suppliers. In pensions’ terms, the collapse was a problem to the scheme trustees and it is an immediate problem to the members of the BHS pension scheme. It is a potential problem for the TPR (see above) and the state-backed but not state-funded pension protection fund (PPF). With a warning to the non-technically minded to check their emails now, the PPF is the pensions equivalent of a safety net. It is designed to ensure that at least a proportion of the benefits of all members of schemes, schemes which have been left underfunded by insolvent employers, are paid. The reader will note that PN wrote “a proportion” and not “all”. If or (perhaps) when the BHS scheme is assumed by the PPF, it is safe also to assume that administering that scheme will strain the resources of the PPF.
That last comment is relevant to the more recent news, reported in the FT on 12 May, that the Government is planning to cut the liabilities of another large pension scheme which is in trouble; the British Steel Pension Fund. The British Steel fund has been sponsored by the ailing company which Tata Steel is currently trying to sell. The British Steel fund has assets of an approximate value of £15bn and a deficit of around £485m. The British Steel fund has approximately 133,000 members. If the British Steel fund had to be transferred into the stewardship of the PPF, then PN is confident in asserting that administering that scheme would put a strain on its resources. Having to accept both the British Steel fund and the BHS scheme (at roughly the same time) would put still more of a strain on the PPF’s resources.
PN can hear you, the reader, asking what the Government could do to cut the liabilities in the British Steel fund and why it would do something like that. Well; according to the FT, the Government could intervene to link increases in benefits to the consumer price index (CPI) as opposed to the retail price index (RPI). This, estimates the Government, could result in savings of £2.5bn.
Why would the Government do this? Well, possibly, for the same reason that TPR has so far rejected offers from Sir Philip Green to put amounts of money in the scheme which, though large by the standards of most readers (not to mention this article’s writer), are small when measured in terms of how big the pension scheme deficit actually is. If the scheme could be funded up to a certain level, it would not need to be assumed by the PPF. Continuing with the British Steel imbroglio; any reader who watched the news a few weeks ago will recall that the Government came under some pressure to do something to safeguard the jobs of those in British Steel and it suffered (arguably) reputational damage by indicating it would do everything it could short of actual, tangible help. If, let’s say, the legal gymnastics which may be required to achieve a switch from the RPI to the CPI works and the £2.5bn saving is achieved, this would, PN thinks, allow the pension scheme to be isolated from any potential sale (thus making the British Steel plant more attractive to a buyer) and it may prevent the scheme from having to go into the PPF. Perhaps this would restore the Government’s reputation (it would also give pension experts a lot to think about as switching from RPI to CPI has kept some lawyers busy for years) because, as PN readers will know, there isn’t really any such thing as reputational damage, there is only reputation. A reputation can be damaged and restored; but only after someone starts to talk straight. PN will watch the news about BHS and British Steel with interest.
Until next time…….