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Sentence first, verdict later. Rushing to judgement over BHS

May 12th, 2016

Green photo

Sir Philip Green potentially makes for a good pantomime villain.  He has never gone out of his way to charm the public and he has contacts in elite political circles.  His wealth is fabulous and flaunted.  His tax management strategies have blazed across the front pages of the newspapers.  And now his former flagship company BHS has gone bust, leaving a pension scheme that is half a billion pounds short, and he has taken large dividends from the company over the years.  Parliamentarians and the press are out for blood.

Have the press nailed a new corporate predator or are they engaged on a witch hunt?  Disappointingly, the answer is that it is far too soon to tell either way – not that it will stop people from speculating according to their preferred agenda.  We can, however, look at what the story has to tell us about how this country handles dull but important subjects.

Employers have been offering pension schemes to their workers as far back as the seventeenth century but their current efflorescence dates from the first half of the twentieth century.  For many years the only government regulation concerned the tax breaks that employers got for offering pension schemes.

It was not until the 1970s that their integration with social security started and it was only after the Maxwell empire collapsed in 1991 that the DSS intervened to set minimum levels of pension scheme funding.  This was revised in 2003 following a series of highly-publicised cases where some employers had stuck to the bare minimum on winding up the scheme, resulting in some long-serving employees receiving almost nothing.  It was only from that point on that employers were placed under obligations to ensure that pension scheme funding was adequate to secure all benefits.

This may sound extraordinary but it had not been a significant problem until then.  Until the mid 1990s, securing pension scheme benefits with an insurer had been cheap (because of high interest rates and pessimistic assumptions about life expectancy).  With inflation remaining persistently low from the early 1990s onwards and life expectancy being repeatedly revised upwards, insurance company quotations soared in price.  It certainly did not help that for the first few years of this century the stock market was in the doldrums.  A theoretical problem only became live then.

The government also put in place as from 2005 anti-avoidance measures to seek to make sure that shareholders could not asset strip businesses to sidestep their obligations to the pension schemes that they sponsored.  The power to monitor and enforce this was given to the Pensions Regulator.  If everything went wrong, the government had set up a levy-funded lifeboat called the Pension Protection Fund.

Why am I labouring over the time frame of this?  First, to show that the current regulatory system is pretty new and hasn’t been tested much.  Secondly, to show that the obligations that BHS and Sir Philip Green were under changed considerably during his ownership of that company.

At this point, you might be asking why all pension schemes aren’t now kept fully funded on an insurance company basis.  That would indeed guarantee all pensions are paid in full.  This was a proposal touted by the European pensions regulator, which it has only backtracked on in the last month.  That would, however, require British industry to inject something like £250 billion into their pension schemes straight away (for comparison purposes, that’s more than three times the British government’s annual deficit).  Obviously, this was not particularly appetising to the private sector.

So pension schemes, overseen by the Pensions Regulator, have been seeking to get to full funding over appropriate timespans, having regard to the strength of their sponsoring employer.  The art is to get the schemes as secure as possible as quickly as possible without crippling their employer’s business.

This would be a tall order for even the nimblest regulator, weighing the risks of corporate insolvency over the proposed recovery period against the risks being run with the proposed actuarial assumptions, while keeping a close eye on external economic conditions.  The Pensions Regulator is not the nimblest regulator.

And now things have gone wrong for BHS.  Solid facts are quite hard to come by but it seems that its pension scheme was in actuarial surplus as recently as 2008 (quantitative easing was a hammer blow for pension scheme solvency).  That begs the question what assumptions were being used but actuaries have professional duties to be prudent.  Should the Pensions Regulator have insisted on greater prudence?  Don’t forget that it would have been looking at this at the time when the markets were going through a historic crash.  The Regulator at that time decided as a general principle that pension scheme trustees need not push employers too hard.  That seemed wise then and still does.  It was better to give companies a bit of breathing space than to force them into insolvency to no purpose.

The Pensions Regulator is still investigating what it might do about BHS.  That investigation looks likely to be complex and document-heavy (the Regulator is ploughing through 70,000 pages).  Already, however, some members of the DWP Select Committee seem to be grandstanding.  The Pensions Regulator’s chief executive was given little support on Monday afternoon from the MPs quizzing her.  Some of the questions looked inappropriate given that a quasi-judicial process is ongoing.

The Select Committee – which has the luxury of not being held to account for its decisions – should be focussing on the decision-making process.  The Pensions Regulator may well have made mistakes.  The Select Committee should be mindful that it is looking at events with the benefit of hindsight.

And perhaps we can break new ground and avoid a series of dramatic recommendations for upending the current system.  Changing the regulatory regime in response to the latest news story every few years is not good for consistency and doesn’t help the Regulator.  Whatever system we have in place, a balancing act between funding securely and giving business flexibility will need to be struck.  Perhaps we could try the current one out for a little bit longer?

Sir Philip Green may make for a tempting target for Parliament and the press.  But whatever the rights and wrongs of this particular case, our problems with our pensions system are much more deep-rooted.

Alastair Meeks