Business

BHS woes remind us of ongoing trend in pensions

The pension scheme at failed BHS has been under scrutiny
The pension scheme at failed BHS has been under scrutiny The pension scheme at failed BHS has been under scrutiny

HAVE you been following the recent news of British Home Stores? That old girl of the UK high street has been walking through a red valley of tears for some time.

The chain’s owner Retail Acquisitions had sought emergency funding to stay in business, but to no avail. Now the accountancy firm Duff & Phelps has been called in to handle the administration of the company.

Behind-the-scenes talks have so far failed to find a ‘white knight’ to rescue BHS, which employs a total of 11,000 workers throughout Britain and Northern Ireland. Here's the reason: BHS has about £1.3bn in debts, of which £571m stems from a deficit in the BHS pension scheme.

This is far bigger than the scheme's assets and insiders are saying that assuming such a huge burden may be one of the reasons that BHS has failed to find backers or buyers for the business at a whole.

In fact, when Sports Direct expressed interest in acquiring some of the BHS stores, it made clear that it would take on no part of that giant pension debt. The deal fell through.

So why is this relevant to us reading this column? Because a large part of BHS’s problem stems from its struggle to service its final salary pension scheme, which was closed to new members seven years ago.

BHS is just the latest such scheme to close, but as you will see, it throws light on a trend that affects each and every one of us, whether we are in a final salary pension or not. That is the trend towards private sector employers reducing their pension obligations in the struggle to manage their costs.

There are plenty of precedents, since the pensions obligations arising from final salary schemes became particularly severe at the end of the 1990s, leaving many large employers struggling with huge debts to service their pensions.

It wasn’t just private sector, either – it was revealed that a quarter of all the monies collected in poll tax in England were being sucked into servicing out-of-control final salary pension schemes for local council workers.

As you may know, final salary schemes are also known as ‘defined benefit’ pensions, because they are linked to your salary level when you retire, and thus contain a guarantee to staff that has to be met.

The employer hopes that this will be possible based on returns on investment of the pension cash. However, failing that, the company must stump up out of its own pocket.

Putting it another way, in a final salary pension scheme it’s the employers, and not the employees, who carry the risk.

The pensions graveyard is littered with final salary schemes that had to be closed to new members in the past decade. In fact, by mid-2010, over 90 per cent of all such schemes had been closed (whilst of course continuing to meet their obligations to existing members).

The big names to do so included big hitters such as Pirelli, Costain Construction, Morrison’s supermarkets, Barclays, Lloyds, IBM, Fujitsu, and Dairy Crest Foods. These companies then opened defined contribution (DC) pensions, which have no guarantee of a certain pension income for staff.

In other words, the shift towards DC pensions means that the investment risk has been shifted away from the employer, and on to the shoulders of the employee, whose pension will now simply reflect the returns on investment of the fund.

This is how the private sector has reduced its risk of investment-related problems with pension schemes.

Now let’s look at the government’s ongoing review of pensions, and sum up very briefly the underlying forces that will inform actions on the government side, over the next few years. Again, the challenges faced by pension savers are very different to the situation just a decade ago.

In this year’s budget, George Osborne said he needed to achieve additional cuts of £4bn over the next four years. The cost of tax relief provided for pension saving in just one year is over 8 times that amount, at around £34.2bn.

Hence the widespread belief that tax relief is a ‘sitting duck’ for the next round of cuts.

We need to keep ahead of the changes, we need to ensure we are saving enough to have a decent life after our working career. We need to consider upping the amount we are saving, or consider if we need a personal pension for ourselves, even if that is in addition to our workplace and our state pensions.

The fact is that, in a world where both private sector employers and the government are cutting the cost of their pension obligations, “your pension is your problem”, and the time to grasp the nettle is: now.

:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005.