Pension Protection Fund and Pensions Regulator inquiry

The collapse of BHS, which left its pension funds in a deficit of £571 million, was precipitated by gross failures of corporate governance. We welcome the Government’s green paper on corporate governance reform. This Report is our response to that consultation, based on our BHS inquiry and our subsequent work on pensions.

We have not sought to cover the breadth of the consultation, which is the domain of our colleagues on the Business Committee, and have restricted our comments to areas relevant to pensions. The three recommendations in this response should be read in conjunction with the more substantial proposals in our December 2016 Report on Defined benefit pension schemes. Our recommendations are:

(1) The Financial Reporting Council Corporate Governance Code, which currently applies only to public listed companies, should be extended to large private companies and those with over 5,000 defined benefit pension scheme members. BHS was a private company but the effects of its collapse spanned widely: not least to its thousands of employees and pensioners who have lost out while those who owned BHS took lavish rewards. This measure should improve transparency about governance arrangements, performance and risk in private companies to the benefit of stakeholders including pension scheme members.

(2) Pension scheme trustees, who must act in the interest of scheme beneficiaries, should be added to section 172(1) of the Companies Act 2006. That legislation sets out the duties of company directors, including a list of stakeholders to whom they must have regard in the course of their duties. Directors of larger companies must then report on how they have performed those duties in an annual Strategic Report. The current list does not explicitly account for defined benefit pension scheme members. Their income in retirement is reliant on the sustained success of the sponsoring company but former employees in particular are at particular risk of being neglected in corporate decision making. Our recommended measure may increase the chances both that directors would take into account the interests of pensioners in carrying out their duties and that those who have failed to do so will be held accountable in the courts.

(3) Future Insolvency Service reports should be published when there is significant public interest in publication. There is a legitimate public interest in the complete story of the failure of BHS being laid bare. We welcome the Government’s indication that it will seek to publish Insolvency Service findings into BHS.

Our inquiry on the collapse of BHS provided the backdrop to our broader work on defined benefit (DB) pension schemes. BHS was an extraordinary tale characterised by behaviour fortunately very far removed from the usual standards of British business.

The case, and other high-profile schemes in difficulty, did however highlight wider flaws in DB schemes and their regulation. The Government intends to publish a Green Paper on the issue in early 2017. In this report we make recommendations for changes which should be taken forward or consulted on in that document.

Our approach

In our recommendations we have sought to avoid knee-jerk recourse to additional box-ticking regulation. Instead we have aimed to put incentive structures in place to make it more likely that DB pension schemes will be sustainable and that employers will honour their responsibilities. In turn, this will make it less likely that the Pension Protection Fund (PPF), the pension scheme lifeboat, will be called upon. Responsible employers, which are the overwhelming majority, have nothing to fear from what we propose.

A nuclear deterrent to avoidance

Our most high-profile recommendation epitomises this approach. The existing anti-avoidance powers of the Pensions Regulator (TPR), which act as its final backstop to ensure scheme sponsors honour their promises, are retrospective and often exercised through drawn-out legal battles. An employer seeking to avoid his or her responsibilities may well take a punt on risking enforcement action, leaving pensioners in extended limbo. We wish to deter such behaviour and encourage sponsors to properly fund schemes and seek clearance for corporate transactions which may be to their detriment.

We recommend the Government consult on proposals to empower TPR to impose punitive fines that could treble the amount payable. The intention would be that such fines would not need to be imposed: they would act as a nuclear deterrent to avoidance.

Empowered trustees and scheme members

We want to arm trustees with the powers necessary to represent the interests of scheme members. It is unacceptable that scheme sponsors can keep them in the dark: trustees should be able to demand timely information. We also recommend the Government consult on proposals to enable trustees, subject to TPR approval, to:

• consolidate small schemes in an aggregator fund to be managed by the PPF, creating economies of scale for both schemes and TPR; and • agree changes to the indexation of pension benefits in instances where such changes are needed to make a scheme sustainable, including conditional arrangements that will revert to original uprating when good times return.