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Tighter pensions rules urged to avoid BHS-style failures

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The Pensions Institute has issued a stark warning over businesses "milking and dumping" pension schemes, as it called on the government to do more to prevent this.

It came after a study by Keith Wallace, president of the Association of Corporate Trustees and author of the report, found dozens of examples of businesses exploiting surpluses and shedding deficits in their schemes.

It found 15 means of shifting or shedding a pension deficit, and 20 ways pension surpluses had been exploited. This would help failures similar to those of BHS and Tata Steel.

It called for the creation of an "early warning programme" which will actively seek out and start negotiations with weak employers.

Professor David Blake, director of the Pensions Institute, said: "A pension scheme is like a coach and horses carrying gold on a long journey through hostile territory in a Wild West movie."

"Despite the determination of the trustees to navigate a safe journey over the rocky terrain and the bravery of the Pensions Regulator as outrider, the coach with its valuable bullion is a sitting duck for corporate ingenuity."

Keith Wallace added: "Some of these things have been going on for 40 years. It is naive to think they have now stopped, especially given the current enormous size of pension deficits."

"The Pension Protection Fund faces a huge moral hazard as a result of the practices employed by some companies in this country."

Ways scheme surpluses have been exploited

  • Employer now has the scheme bear administration costs, etc
  • Employer "loads" administration cost recovery against the scheme
  • The scheme receives inward bulk transfer from other underfunded scheme/s of the employer
  • The scheme assumes hitherto unfunded pension obligations
  • The scheme assumes health, death-in-service, accident, redundancy benefits hitherto met from payroll
  • Augmented benefits replace bonus and golden hellos
  • A promise of generous bulk transfer increases saleability and sale price of divested subsidiary
  • Scheme makes “investment” loan to (external) buyer of asset from employer
  • Scheme makes “investment” in securities of business sold-off by employer
  • Scheme enters into sale and leaseback of property in favour of business sold-off by employer.

Ways of shedding or sidestepping a deficit:

  • Large, excessive dividends
  • Interest-free loans granted to non-scheme affiliates
  • High interest bearing loans received likewise
  • Transfer pricing prejudice intra-group
  • Creation of "central" purchasing or sales to cream off margin likewise