28th April 2016
The BHS pension is extremely unlikely to fall on the taxpayer as the safety net is provided by the Pension Protection fund unwritten by annual levies from the pension schemes of solvent employers.
Experts have also pointed out that while BHS workers who have not yet retired will take a hit to their pension, 90% of entitlement will still be paid up to a cap of £33,678.38 when they retire. Those already in receipt of their pension will continue to receive the full pension.
The PPF is currently 115% funded to meet its existing liabilities from other schemes where the employer has gone into administration.
The Department for Work and Pensions is to hold an inquiry into BHS and what it means for the PPF. In addition, the Pension Regulator is hoping to convince previous owner Sir Philip Green to contribute more to the fund.
Tom McPhail, Hargreaves Landown head of retirement policy, says: “Many people will find it shocking that BHS, a company which has been so successful in the past, could leave its employees’ pensions so short of cash and in such a short space of time. They are now likely to end up dependent on the Pension Protection Fund, which is paid for by a levy on the rest of the UK’s final salary pension schemes. The Protection Fund is currently in surplus, with around 115% of the money needed to meet all its promises; it has assets in excess of £20 billion, so whilst this situation is clearly not good news for the current and former employees of BHS, there is a robust safety net there to catch them.”
McPhail notes that the PPF is funded by an annual levy on defined benefit pension schemes and contrary to popular opinion it has no direct support from the tax payer. The scheme currently has assets of over £20 billion and is in surplus. “If the PPF were ever to start running out of money, it could either increase its levies on schemes, or apply to parliament for permission to reduce the levels of pay outs.”
He adds: “For now, BHS scheme members will see very little change in how the pension scheme is administered. It will continue to be run by its existing administrators and trustees. Retired members will continue to receive 100% of their existing pension; however new retirees will now only receive 90% of their entitlement, capped at £33,678.38. This means higher earners could receive less than 90% of their pension entitlement. Over time members pay outs will also now receive lower inflationary increases, meaning the value of their pensions may diminish in real terms.”
Transfers out of the BHS scheme are no longer permitted.
The PPF will now conduct an assessment of the scheme’s assets and liabilities, which could take some considerable time. The process though not anyone’s pension payment could be delayed by TPR’s action to seek more money from Sir Philip.
The DWP Committee review could open up some more fundamental questions around the long term viability of final salary scheme promises more generally, given the £300 billion deficit which exists today when all UK schemes are added together.