 |
The BHS Pension Iceberg
Back in the days when I believed that rolling
pins were for making pastry, a “final salary pension” was just part of your
package. When you retired you got two
thirds of your final salary for the rest of your life. But it seems that BHS is
another victim of its final salary pension “iceberg” – or at least that was
part of the cause.
The issue with final salary schemes is twofold.
Firstly, people are living longer so they don't know how much money they are
going to have to fork out in future. Secondly, people these schemes aren’t
willing move across to a modern scheme which doesn’t guarantee their pension level
…..can’t imagine why! This
theoretically unsinkable system is heading tentatively through the ice field of
weak economic times and there is realisation that first class promises don’t
guarantee you a comfortable spot in the lifeboats!
So, how long a gash has the final salary iceberg
put in the side of the BHS ship? Like finding lifeboats on the Titanic, immediate
retirees should be fine but those retiring in 5 - 10 years may find their
pensions holed below the waterline unless a former employer (Phillip Green is
in the cross-hairs at the moment for BHS) or the Government (i.e. you and me!)
puts more money in.
Many of the large companies that have final
salary schemes are facing potential insolvency because the regulations require
the fund to be topped up long in advance of when the cash flow is actually
needed to fund pensions. Funding is
based on projections of actuaries in terms of the life expectancy and the
performance investments (mainly shares in other big companies – spot the
vicious circle?).
But hold on – if the cash isn’t needed yet why
do they need to top the fund up now?
Yes, we need rules in place to make sure that
employee’s pots are protected but the rules are too aggressive because, within
a short period of time, a fund could become “over funded” when market
confidence changes. In the meantime some,
otherwise solid, companies will have been bankrupted.
In reality BHS’s failure was only partly down
to the pension issue. It hadn’t kept up
with the dynamics of the high street. Some big high street names continue to
struggle financially in the face of online offerings and changing tastes.
M&S saw similar issues a few years ago and seems to have pulled itself back
from the brink to some degree. The difference is that BHS had a £1/2billion final
bow wash from its pension scheme.
BHS is not the only company with this scale of albatross
circling. So the question is: should
this be a yard arm walking offence? Why should a company be forced under by a theoretical
deficit? We need to look at the long
game so companies able to operate solvently day to day can survive. The US has
a system that would mean that the company are put into a protective “dry dock”
for a while – surely a better option than losing more large businesses to the
history books.
Published in Huddersfield Examiner on 24th June 2016
Published in Huddersfield Examiner on 24th June 2016
