Friday, 24 June 2016

Another business Titanic hits the pensions scheme iceberg!

The BHS Pension Iceberg

Back in the days when I believed that rolling pins were for making pastry, a “final salary pension” was just part of your package.  When you retired you got two thirds of your final salary for the rest of your life. But it seems that BHS is another victim of its final salary pension “iceberg” – or at least that was part of the cause.

The issue with final salary schemes is twofold. Firstly, people are living longer so they don't know how much money they are going to have to fork out in future. Secondly, people these schemes aren’t willing move across to a modern scheme which doesn’t guarantee their pension level …..can’t imagine why!   This theoretically unsinkable system is heading tentatively through the ice field of weak economic times and there is realisation that first class promises don’t guarantee you a comfortable spot in the lifeboats!

So, how long a gash has the final salary iceberg put in the side of the BHS ship? Like finding lifeboats on the Titanic, immediate retirees should be fine but those retiring in 5 - 10 years may find their pensions holed below the waterline unless a former employer (Phillip Green is in the cross-hairs at the moment for BHS) or the Government (i.e. you and me!) puts more money in.

Many of the large companies that have final salary schemes are facing potential insolvency because the regulations require the fund to be topped up long in advance of when the cash flow is actually needed to fund pensions.  Funding is based on projections of actuaries in terms of the life expectancy and the performance investments (mainly shares in other big companies – spot the vicious circle?).

But hold on – if the cash isn’t needed yet why do they need to top the fund up now? 

Yes, we need rules in place to make sure that employee’s pots are protected but the rules are too aggressive because, within a short period of time, a fund could become “over funded” when market confidence changes.  In the meantime some, otherwise solid, companies will have been bankrupted.

In reality BHS’s failure was only partly down to the pension issue.  It hadn’t kept up with the dynamics of the high street. Some big high street names continue to struggle financially in the face of online offerings and changing tastes. M&S saw similar issues a few years ago and seems to have pulled itself back from the brink to some degree. The difference is that BHS had a £1/2billion final bow wash from its pension scheme.

BHS is not the only company with this scale of albatross circling.  So the question is: should this be a yard arm walking offence? Why should a company be forced under by a theoretical deficit?  We need to look at the long game so companies able to operate solvently day to day can survive. The US has a system that would mean that the company are put into a protective “dry dock” for a while – surely a better option than losing more large businesses to the history books.

Published in Huddersfield Examiner on 24th June 2016