Natural selection is one thing, wilful destruction another- thoughts on Arcadia

It will come as little comfort to the 13,000 staff who work for Arcadia, but the threat to their current income and future pension is not from scandalous behavior on behalf of Philip Green and his wife. They have played by the rules and the collapse of Arcadia, owner of Topshop, was a result of it being  slow to invest in ecommerce. The pandemic piled pressure on retailers that still depended on physical stores for most sales.

Ros Altmann, in an article in Corporate Adviser explains that while both Arcadia and BHS have common ownership, the fate of their pensions schemes will be different. The BHS scheme struggles on as a result of a £348m cash injection from Green but the cost of keeping Arcadia afloat cannot be met by the payments from Green’s wife that have been agreed with the Pensions Regulator.

This is why the Pension Protection Fund exists and though staff will take between a 10 and 20% lifetime cut in pension payments, they will at least be part of a well run, well funded pension scheme that will provide them with security. Of course, the majority of Arcadia staff never joined the defined benefit scheme, for them – prospects of future contributions into their defined contribution pension schemes depend on whether they continue employment. Future employers may not choose to make contributions at anything more than the statutory minima required by the auto-enrolment regulations. By comparison, those who benefited from the DB plan – will – even with the PPF pension, be a whole lot better off.

For staff at Debenhams, the same scenario is likely to play out and there will be many people who will be looking at their defined benefit pension rights and considering the strength of the employer they work or worked for. The messaging from the Pensions Regulator , the PPF and Government in general needs to be positive. Going into the PPF is not the end of the world.

That we have a PPF at all, is largely down to the campaigning zeal of Altmann and the skilled craftsmanship of Andrew Young , the architect of the lifeboat that has successfully taken on obligations from many failed pension arrangements over the past decade. Sickening as it is to find your job and pension under threat in the month leading up to Christmas, without the PPF – matters would be a whole lot worse.

Many will argue that the assumptions that underpin the funding of the PPF and the levy it demands of the sponsors of extant DB schemes are too conservative and that the PPF has had been feather-bedded into its current healthy financial position. But the bets that the PPF has taken – principally that interest rates will continue to fall, have paid off and its running costs have been kept in check by insourcing functions (including its asset management). Consequently, the PPF stands ready to receive not just Arcadia and Debenhams , but the many schemes who’s capacity to meet their bills are going to be severely tested in 2021.

So far so good – but let’s not lean on the PPF too hard

There is in business a natural failure rate. We cannot take the survival of any employer for granted and the idea behind “integrated risk management” is to create a balance between the capacity of employers to pay and the need for trustees to be paid the deficit contributions needed to keep schemes solvent.

This delicate balance is generally working well. But it is threatened by the imposition of the TPR’s DB code which would radically readjust the balance in favor of trustees. In particular, the requirement of schemes to achieve self-sufficiency from  employers, would be achieved by moving scheme assets into investments such as Government bonds delivering so little return that the demands on employers are likely to shoot up.

Faced with these increasing demands for deficit payments, many employers, already struggling for cash flow as a result of trading conditions and the economic downturn, will find themselves with no options but to close their doors and seek the help of the PPF.

Natural selection is one thing, wilful destruction another

If the loss of Arcadia and Debenhams is down to the natural selection of business to survive and fail, then TPR can deal easily with the WPSC’s questions about the handling of their pension schemes. I didn’t detect undue concern on Charles Counsel’s face at a meeting I had yesterday, which he was chairing.

But if we start to see business failure in the years to come, resulting from TPR exercising powers over trustees and employers given to the in the Pension Schemes Bill and used to force through the draconian  conditions of the DB funding code, that is a different matter.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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9 Responses to Natural selection is one thing, wilful destruction another- thoughts on Arcadia

  1. ConKeating says:

    It would be perfectly possible for the PPF to pay full benefits – it is done in other markets overseas by their compensation schemes. There is no justification in theory or practice for the cuts which are applied.
    And if the PPF does not want to do this, it and TPR should stand aside and let private sector insurers do this!

    • I asked PPF’s Lisa McCrory (Chief Finance Officer & Actuary) and Stephen Wilcox (Chief Risk Officer) on a webinar (to discuss the 15th edition of the Purple Book) this morning if their investment target of SONIA + 1.8% was high enough. They said it would be reviewed as part of 2021’s funding strategy review.

      I’m not holding my breath.

  2. Martin T says:

    TPR, DWP and HMT seem set on a course of increasing interference in the investment plans and choices of trustees, i.e. to direct that they invest in illiquid long-term infrastructure projects, corporate bonds, gilts and hedging instruments with only a small proportion in equity and all in super-green genuine ESG compliant funds (irrespective of whatever the members want).

    According to TPR, DWP and HMT all that is required is a covenant assessment, then discount the liabilities on a deterministically set gilts plus basis, and set the investment and funding strategy mechanistically to achieve buy-out in no more than 6 years, sucking up as much cash as possible from the sponsor on the way. There need be no consideration of the effect on the sponsor’s discretionary investment or survival, no consideration of the effect on the continuing employment of the members, no consideration of the increased pressure to close open schemes, no consideration of money being diverted away from the funds of younger DC members, no consideration of the unpredictability of cash outflows and the difficulty of funding them from illiquid assets (a more significant problem for closed schemes perhaps).

    They seem to have forgotten the trustees prime duty of acting in the members best interests. For deferred members in a closed scheme, especially when they are no longer employed by the sponsor, aiming to maximise the chance of payment of accrued benefits accurately and promptly, probably will be in their best interests, whatever the effect on the sponsor. For those members still employed, or in an open scheme, their best interests are more likely to be aligned with the continuing health of the sponsor, even with an increased risk of full payment of accrued benefits.

    In short, if TPR, DWP and HMT are convinced that their aims and strategies are the only acceptable, and that wider considerations can be ignored, then why bother having trustees?

    • henry tapper says:

      I quoted this magnificent rant in full to the DWP yesterday afternoon.

      • Chris Giles says:

        And how did they respond?!!

      • henry tapper says:

        There was very little direct response though there was an encouraging amount of support for the idea of investing rather than de-risking. I see the Pensions Minister continues to implore open schemes to invest for the future in today’s Professional Pensions, let’s hope that some can afford the luxury!

      • Martin T says:

        I’m sure they’ll say “Oh but bespoke is an option and you can/should aim to minimise any adverse impact on the sustainable growth of an employer”. Yes ok but that doesn’t address the other potential adverse effects on the members nor the fundamental point that TPR, DWP and HMT all seem intent on trying to dictate (or at the very least steer) where trustees invest.

  3. Tim Simpson says:

    Hello Henry, I welcomed your blog above and, particularly, Roz Altmann’s factual text setting the record straight regarding BHS/Arcadia. The media quickly enjoy ‘giving a dog a bad name’. As a retiree, I was a casualty of the Three-day Week and it then took me three years to get a decent job. Luckily I had my pension contributions refunded but I fully sympathise with what the Arcadia/Debenhams staff are enduring. Prior to that 1974 debacle was the Rolls-Royce 1971 collapse [a Blue-chip company] yet what wasn’t broadcast then were their many suppliers who subsequently collapsed for want of payment. I wonder what will now happen with Arcadia/Debenhams suppliers. Agreed, this is a normal business risk in the UK. No doubt some debts will be settled by the popular scheme of parcelling up attractive assets and selling them off without debt; I read that in some cases this is a probable management plan. So what happens here to a staff pensions scheme if they are short of management contributions etc…? There seems a lot left for campaigners still to do. Kind regards. Tim Simpson

  4. Dr Robin Rowles says:

    Sir Philip was quoted at the time of the BHS collapse that he was unaware that at the time he sold BHS (and previously) the Pension Fund had been underfunded and also commented that the Pensions Manager had not told him. Strange that, doesn’t the Pension Fund deficit appear on the sponsoring company’s Balance Sheet/Accounts these days? Or is Sir Philip (et al) not the wonderful person he would have us think he is?

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