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BHS pensions debacle

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Following news of the demise of BHS this week and subsequent concerns regarding its pension scheme, the DWP Select Committee has now announced its intention to investigate the impact which the BHS scheme liabilities could have on the PPF.

Tom McPhail, Head of Retirement Policy, Hargreaves Lansdown “Many people will find it shocking that BHS, a company which has been so successful in the past, could leave its employees’ pensions so short of cash and in such a short space of time. They are now likely to end up dependent on the Pension Protection Fund, which is paid for by a levy on the rest of the UK’s final salary pension schemes. The Protection Fund is currently in surplus, with around 115 percent of the money needed to meet all its promises; it has assets in excess of £20 billion, so whilst this situation is clearly not good news for the current and former employees of BHS, there is a robust safety net there to catch them.”

The PPF is funded by an annual levy on defined benefit pension schemes, contrary to popular opinion it has no direct support from the tax payer. The scheme currently has assets of over £20 billion and is in surplus; if the PPF were ever to start running out of money, it could either increase its levies on schemes, or apply to parliament for permission to reduce the levels of pay outs.

For now, BHS scheme members will see very little change in how the pension scheme is administered. It will continue to be run by its existing administrators and trustees. Retired members will continue to receive 100 percent of their existing pension; however new retirees will now only receive 90 percent of their entitlement, capped at £33,678.38. This means higher earners could receive less than 90 percent of their pension entitlement. Over time members pay outs will also now receive lower inflationary increases, meaning the value of their pensions may diminish in real terms.

Transfers out of the BHS scheme are no longer permitted. The PPF will now conduct an assessment of the scheme’s assets and liabilities, which could take some considerable time. In an unusual move, the Pensions Regulator has indicated that they may pursue Sir Philip Green for additional contributions to the BHS scheme. This could delay the PPF assessment process, which will not be concluded until all available money has been brought into the BHS scheme. The DWP Committee review could open up some more fundamental questions around the long term viability of final salary scheme promises more generally, given the £300 billion deficit which exists today when all UK schemes are added together.

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