Pensions watchdog warns another BHS-style disaster could happen unless MPs act

The CEO of The Pensions Regulator (TPR) has told the Financial Times she wants the watchdog to have powers to veto takeovers involving distressed pension schemes to stop another under-funded pension disaster on the scale of BHS.

TPR CEO Lesley Titcomb told the paper:

"Another BHS-type sale could happen because of clearance being voluntary. If we are not approached then there is nothing we can doing about it. That is why one of the areas we need to look at is whether, in certain circumstances, corporate transactions should come to us."

BHS collapsed into bankruptcy administration in April and its pension scheme fell into the state-backed "pensions lifeboat", the Pension Protection Fund (PPF). The scheme had a funding deficit estimated at around £275 million. The near 20,000 members of the BHS' scheme now face a "haircut" on their eventual payouts estimated at 10%.

Sir Philip Green, the retail billionaire who until last year owned BHS, has been blamed by MPs for failing to properly invest in both BHS and the pension scheme under his ownership. MPs were also highly critical of his decision to sell the failing chain to Dominic Chappell, a two-time bankrupt with no former retail experience.

Titcomb told MPs during their inquiry into BHS' collapse that the watchdog had tried to interrogate the deal's implications for the pension scheme but Sir Philip Green resisted "moral hazard" questions, which looked at how much money had been taken out of the business. Titcomb said that the regulator only learned of the final sale by reading about it in the press.

Titcomb added in the FT interview that potential veto powers would be relatively limited, as they would only apply to deals involving underfunded defined benefit pension schemes, of which there are a dwindling number. Titcomb says:

"We are talking about a limited set of circumstances here, perhaps where there is underfunding [of the pension]. I think we do need to recognise, though, that any such power has to be proportionate. To require all corporate transactions to come through us would gum up the system. Cases like BHS are rare."

TPR is now pursuing action against Sir Philip Green's Arcadia Group to try and claw back money to fund the pension deficit. Labour MP Frank Field, who co-chaired the Parliamentary inquiry into BHS, has also repeatedly called for Sir Philip to write a cheque to cover the shortfall. Green insists he is working with the regulator to find a solution.

A £900 billion problem

While Titcomb says "Cases like BHS are rare," shortfalls in defined benefit pension schemes are a growing problem in Britain.

Former Pensions Minister Steve Webb warned in his submission to the BHS inquiry that there are "many hundreds of 'zombie' schemes" in the UK that have "no realistic chance of the pensions promises being met."

These are all defined benefit schemes. Defined benefit schemes are pension schemes where members are promised a certain level of payout once they retire. These are increasingly unworkable because people are living longer, meaning employers need to meet these payout levels for longer, and because interest rates are in the toilet, making earning the money to pay the pensions all but impossible.

Most companies are closing or no longer offering defined benefit pension schemes to employees (Royal Mail is in talks to close its scheme) but for those companies that still have to service one, the scheme is a millstone around its neck.

The collective deficit in Britain's defined benefit pension schemes is estimated at £900 billion and looks set to only get worse thanks to negative yields and interest rates falling further to 0.25%. But the Bank of England has bigger things to worry about right now than the effects of its policies on pension schemes - namely, keeping the economy afloat.

Webb told BI in May: "A dose of high inflation would go through this like a dose of salt. Higher interest rates and inflation would very quickly change the situation. But we're going to have a sizeable deficit for years to come."