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.