The details of BHS’ pension black hole were laid out to MPs on Monday, with the scheme suffering a shortfall of up to £300 million.
MPs are probing the collapse of BHS last month, asking how appropriate the sale of the chain by retail billionaire Sir Philip Green for £1 last year was and whether the tycoon should be made to pay for the pension shortfall.
But the inquiry has also exposed evidence showing that there are hundreds of other schemes teetering on the brink like BHS was.
The department store could be the tip of the iceberg when it comes to a pensions crisis.
Former Pensions Minister Steve Webb says in written evidence to the joint Work and Pensions Select Committee and Business Select Committee inquiry into the collapse of BHS (emphasis ours):
Analysis of all the remaining DB [defined benefit] schemes suggests that there may be many hundreds of ‘zombie’ schemes. These are schemes where there is no realistic chance of the pensions promises being met. They will generally have large deficits, long recovery plans, and a weak sponsoring employer. These schemes are generally ‘drifting’ towards the PPF [Pension Protection Fund] but unless an insolvency event occurs, they continue to limp along from year to year. The employer may be meeting his annual payments, but the deficit can often be going up rather than down for the reasons discussed earlier.
Alan Rubenstein, the CEO of the state-sponsored Pension Protection Fund which takes on pensions schemes of failed businesses, told MPs yesterday that there are currently around 5,000 pension schemes across the UK in deficit, with 600 to 1,000 at serious risk.
The issue is with so-called “defined benefit” pension schemes, a private pension scheme that has been pretty much phased out now. The schemes promise members a guaranteed certain income when they retire.
A deficit should not be fatal — simply top it up and it continues as normal — and these schemes worked fine in the past. But two factors have combined to make them totally unworkable in recent years.
Firstly, people are living longer. That means you need to pay more to them than companies may have initially budgeted when the employer joined the scheme, say, 40 years ago.
The second issue is record low interest rates, which mean pension schemes aren’t getting the returns they had hoped for.
The result is that “schemes and their employers have in recent years been ‘running to stand still,” Webb says. “Because interest rates have continued to fall and longevity has continued to improve, underlying deficits have tended to deteriorate. So even an employer who agreed a recovery plan and sticks to it can find that at the next three-yearly revaluation the deficit has gone up rather than down.”
In other words, you’re bailing out water but it’s streaming into the bottom of the boat faster than you can work.
The problem is reminiscent of the many “zombie” companies that sprung up in the wake of the financial crisis, making just enough to pay the interest on their debts but not enough to pay the actual capital on the loan.
Many pension schemes are failing to admit that record low interest rates are around for the foreseeable future. Rubenstein told MPs: “It’s certainly my sense that there is a fair degree of hope about the future course of interest rates.”
But Phillip Coggan, a columnist with The Economist, says in a separate written submission (again emphasis ours):
Some might say that those low interest rates should be ignored because they are temporary, or simply a function of accounting. But the Bank of England’s official rate has been at 0.25% for seven years, far longer than anyone would have envisaged in 2009. The Bank of Japan has had 15 years of low official rates and bond yields without any sign of a change. And this is NOT just a matter of accounting. The cost of pensions has objectively risen — as will be discovered by any company wants to offload its pension scheme via the buyout markets.
How do you fix the problem? Webb says: “There are no particularly palatable options and simply allowing the situation to drift on is an option — perhaps in the hope that a mixture of higher interest rates and higher inflation will ride to the rescue.”
Other options including watering down commitments to scheme members — in other words cutting people’s pensions — or letting those deemed to be “zombie” schemes to make more risky investments “akin to ‘betting the fund on the 3.30 at Haydock’,” Webb says.
The future for these pension schemes looks bleak.