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Pension issues surrounding insolvent companies - news article image

Pension issues surrounding insolvent companies

3 Nov 2016

3 minute read

Today’s papers once again saw Sir Philip Green on the front page as the Pensions Regulator issued enforcement notices to the former BHS CEO in light of the company’s pension deficit.

Pension regulation has been in place for many years with the Government taking action to protect employees and their pension schemes, and ensure that employers properly fund such schemes.

Put simply, a defined benefit pension scheme (often referred to as a final salary scheme) is one where a promise is made by an employer to pay a pension to employees based on a formula that takes into account their final salary and total number of years’ service. These schemes grew to prominence in the Second World War but by the 1960s they were deemed unsustainable due to a higher life expectancy, at which point, ‘money purchase schemes’ were introduced. A money purchase scheme allows employers and employees to contribute to a ‘pension pot’. The employee can then decide how to utilise this pot once they turn 55.

In order to protect employees with defined pension schemes in place, a valuation of the scheme’s resources is taken every three years to guarantee the scheme will meet its obligations. This is a moving feat due to constant economic flux and a continually increasing life expectancy. Shortfalls identified within this review allow the Pensions Regulator to demand of an employer that they put in place a programme to increase contributions to a pension scheme (normally a programme of increased contributions over a maximum period of ten years).

So how does this apply to BHS? Well BHS, like many major employers, have a benefit scheme that has been in deficit for many years and negotiations with the Pensions Regulator have not been successful. BHS has seen particular financial difficulties which led to the company being sold for £1 a few years ago – an event where the Pensions Regulator was unable to intervene in order to protect pensioners.

Once a business becomes insolvent, however, the pension is not simply written off. If a company’s pension scheme is not adequately funded, following insolvency, it is the Pension Protection Fund that becomes responsible for making payments, albeit reduced, to scheme members.

In the debate between Sir Philip Green and the Pensions Regulator, both sides are aiming to achieve very different goals. Green’s proposals suggest the outcome for each member of BHS’ pension scheme will be better than if the scheme is placed under the control of the regulator but not as good as they would get if the scheme were properly funded. In contrast, the Pensions Regulator is looking to achieve certainty that funding will be in place to provide the statutory payments that BHS pension scheme members would achieve if the scheme were to be placed within the Pension Protection Fund.

This case is a clear warning to company directors or charity trustees whose employees, either past of present, are members of a defined benefit scheme. Clive Everitt, our Head of Insolvency and Corporate Recovery division has experience in dealing with companies and charities where the insolvency was triggered by the recognition of the deficit in pension schemes and the inability of the company or charity concerned to plug the gap.

Clive has said that, "In none of the cases in which Shaw Gibbs have been involved has action been taken by the Pensions Regulator against individual directors or trustees but quite clearly the climate has changed; the Pensions Regulator, in conjunction with Parliamentary select committees and other regulatory authorities, are using the BHS example to focus on corporate governance. Directors and trustees need to be extremely careful in the manner in which they conduct themselves when dealing with a company or charity that has a pension scheme in deficit"

At Shaw Gibbs, we have specialist departments dealing with Insolvency, Corporate Recovery, Corporate Finance and Financial Planning all of which can give help and assistance to ensure that our clients protect themselves from criticism arising such issues.

If you would like to meet with any of our specialist advisors in the first instance please contact Clive Everitt on 01865 292200 or via email.

Pension issues surrounding insolvent companies - news article image

If you would like to meet with any of our specialist advisors in the first instance please contact Clive Everitt on 01865 292200 or via email.


Clive Everitt

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