Given our interest and expertise in managing the sponsor covenant and other risks inherent in defined benefit (DB) pension schemes, we pay close attention to events and disclosures in that area.
Therefore, we have been following the developing “BHS saga” and the increasingly heated controversies surrounding it closely, based upon published information.
To summarize very briefly the background: struggling British high street chain BHS (with a history dating back to 1928) was sold in 2015 by its former owner for GBP 1- to a new management team, which attempted to restructure the business. However, in March 2016, BHS entered a form of voluntary bankruptcy, called a CVA, making further attempts to re-finance and continue in operation. However, on April 25th, the company filed for administration, with there being a real risk that it will be liquidated, affecting some 11,000 employees
As unfortunate as this may be for BHS’s trade creditors and landlords, the real controversy surrounds the extent of underfunding in the company’s DB pension scheme, estimated at GBP 571MM (USD 830MM), and the fact that its assets now fall into the control of the Pension Protection Fund (PPF), which becomes an unsecured creditor of the bankruptcy estate, and is likely to suffer a significant hit to its financial capacity as a result. One consequence will be that the expectations of scheme members in terms of existing and future pension payments will not be met because of the constraints on what the PPF is obligated to pay. Extraordinarily, it appears that there was an agreement between the sponsor and the scheme’s trustees that the deficit could be amortized over 23 (sic) years.
While the PPF was set up by the UK government, it is funded by a levy on risk-based existing UK DB schemes, and does not have a government guarantee of its obligations. While the PPF is currently in a much better financial position that the, in reality, insolvent Pension Benefit Guaranty Corp (PBGC) in the US, the collapse of BHS, and likely resulting shortfall in recoveries, means that the PPF will almost certainly have to increase levies on its Members, potentially provoking a downward spiral of further DB scheme closures and rising levies on the “survivors”.
Naturally, questions are being asked about the legality and morality of the actions of BHS’s former owners, as well as why, at the time of last year’s sale, “pre-clearance” from The Pensions Regulator (TPR) was not sought by the DB scheme’s trustees.
We shall not debate here the merits or potential outcomes of the controversy. Suffice it to say that it seems obvious that both TPR and the PPF will pursue all available avenues to understand and learn from what happened, as well as seek recovery of the deficit as widely as possible because of the “moral hazard” and legal issues the BHS case raises.
Our purpose in writing this post is that Awbury can structure and provide realistic, tailored, private market solutions for both Sponsors and scheme trustees to manage the risks inherent in relying upon the Sponsor covenant, and to bridge the inherent gap and potential conflicts between the interests of both parties, such that the ultimate purpose of any DB scheme, namely providing an agreed level of pension and ancillary benefits to all a scheme’s members is honoured in full.
The Awbury Team