Defined Benefit  

Fears BHS pension deal heralds era of 'zombie' schemes

Fears BHS pension deal heralds era of 'zombie' schemes

The landmark deal between Sir Philip Green and The Pensions Regulator agreed yesterday (28 February) risks setting a new precedent for the creation of so-called "zombie schemes", an expert has warned.

The widely-praised deal will see Sir Philip contribute £363m to a new, standalone pension fund for the BHS pension scheme's 19,000 members, who are currently in the Pension Protection Fund.

While the deal promises to leave members considerably better off, it will also mean they have no sponsoring employer to underwrite the scheme if the investments fail to deliver sufficient returns.

John Broome Saunders, actuarial director at pensions consultancy Broadstone, described this structure as a "zombie scheme", and warned the deal could set a new and potentially dangerous precedent for struggling employers looking to offload their scheme.

He said Kodak and Trafalgar House had already made similar arrangements, and predicted more would follow the BHS deal.

"The deal shows we are probably moving towards a position where more employees will have no sponsoring employers," he said.

"I think it will become quite an attractive idea for businesses that are struggling but not at the point where insolvency is inevitable."

He pointed out that, back in June, the PPF itself had explicitly opposed the creation of such a structure for the British Steel Pension Scheme.

Mr Broome Saunders said such structures raised a number of regulatory questions over investment strategy, the appointment of trustees, and how to allocate funds in the case of a surplus.

John Hatchett, head of corporate consulting at fellow consultancy Hymans Robertson, agreed that zombie schemes could become more common.

However, he said this was "potentially a good thing, as long as it happens under the right circumstances".

He said a "cash injection and a zombie structure" might be better for members than the PPF's 10 per cent cut and the prospect of losing their job.

He said it represented a middle ground between a bulk annuity buy-out - a very expensive option - and insolvency leading to schemes falling into the PPF.

"It's not without its risk, though, because members are on the hook," he said, adding the challenge was communicating this risk to members.

Mr Hatchett said zombie structures could be viewed as a return to the pre-Robert Maxwell days when DB schemes were "best endeavour schemes" rather than legally-binding promises.

Darren Redmayne, chief executive of covenant consultancy Lincoln Pensions, also predicted a rise in the number of zombie schemes.

"This is because, sadly, there will be more situations like BHS where the sponsor business can't fund full benefits and where a deal is struck like has been done today," he said. 

He added that the PPF launched a consultation document last week regarding schemes without substantive employers, "suggesting that they perhaps see that there may be more of these going forwards as well".