All defined benefit pension scheme members should be alert to the danger of businesses exploiting their retirement savings then dumping their liabilities, according to a Cass Business School report.
The study is published against a backdrop of problems in defined benefit pension schemes, from BHS and Halcrow to Tata Steel.
In April, BHS went into administration after 88 years of business, putting 11,000 jobs and 20,000 people’s pensions at risk with a £571m deficit to the workplace scheme.
Then in June this year, the trustee of the British Steel Pension Scheme - at 130,000 members, one of Britain’s biggest - urged members to support cuts to their benefit to prevent the scheme falling into the Pension Protection Fund (PPF), in a move that is likely to have ramifications for the entire sector.
And in July this year, it became clear the Pensions Regulator is to face a legal challenge against its decision to allow a major restructure of the chronically underfunded Halcrow pension scheme.
Investigating some of the reasons schemes like BHS, British Steel and others have run into problems, the Cass paper identifies 20 ways in which scheme surpluses have been exploited.
This included employers now having the schemes bear administration costs and employers ‘loading’ administration cost recovery against the scheme.
Written by Keith Wallace, president of the Association of Corporate Trustees and chair of the Legal Advice Panel of the Pensions Advisory Service, the report listed other ways scheme surpluses have been exploited, including:
• 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.
The research also discovered fifteen ways of shedding or sidestepping a deficit. These include:
• Large, excessive dividends
• Interest-free loans granted to non-scheme affiliates
• High interest bearing loans received likewise
• ‘Management fees’ payable likewise
• Transfer pricing prejudice intra-group
• Creation of ‘central’ purchasing or sales to cream off margin likewise.
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”.
Mr Wallace said: “Some of these things have been going on for forty years. It is naïve to think that 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”.
ruth.gillbe@ft.com