Athough the retail group Arcadia, owned by Sir Philip Green’s family, has gone bust, there is good news for its 10,000 pension scheme members. They will go into the Pension Protection Fund lifeboat and receive, on average, about three-quarters of their full promised pension. A handful of very highly paid members will lose more, as the fund payout is capped.
The PPF has taken on 1,000 schemes, with 275,000 members, and has reserves of £5 billion to pay for future bust companies.
To plug the Arcadia deficit, which I estimate is £350 million on a “buy-out” basis, the pension schemes may get some money from second mortgages over the flagship Oxford Circus store in London and a smaller store on Tottenham Court Road but with falling retail property values, how much will be left after meeting the first mortgages?
Sir Philip’s wife, Lady Green, is paying £50 million, agreed as part of a restructuring last year. She also gave a £25 million charge over a loan note, secured on a new distribution centre, but it is unclear how much this is really worth.
The sale price of Arcadia brands, including Topshop, is also unclear and the proceeds will be spread among all unsecured creditors, so pensions will only get a share.
Sir Philip could eventually be strong-armed into writing a big cheque to the pension schemes as politicians are demanding. But he has no legal obligation.
What does Arcadia tell us about the state of pension regulation?
The Pensions Act 2004, defining scheme funding, is deliberately weak. Instead of measuring deficits against a clear and consistent funding standard, and requiring companies to plug them over a set time, it has a DIY funding standard different for each scheme.
The regulator has also made serious errors. In 2013, after political pressure, it dropped its key guidelines, which could trigger an investigation, and also bent its own rules to keep three large schemes going as “zombies” with no company sponsors: Trafalgar House, Polestar and Kodak.
Last year Kodak finally entered the Pension Protection Fund, with an eye-watering £1.5 billion hit, the fund’s largest by a country mile. According to the fund’s figures if the normal rules had been followed in 2013, the hit would have been £900 million, so £600 million, paid by companies through fund levies, is self-inflicted.
Trafalgar House, with a £250 million fund deficit, is now the last zombie scheme standing, but with no sponsoring company making deficit contributions, it is just betting on investment “outperformance” in high-risk assets. The regulator should end this immediately and force it to wind up.
The regulator has just closed a consultation on strengthening pension scheme funding. It wants all schemes to have a “long-term objective” of “self-sufficiency”, so they are not relying on the sponsor for cash payments. These sensible and realistic plans have prompted howls of protests from vested interests in the pensions industry.
A new pensions bill is working its way through parliament, giving the regulator stronger powers, at the margin, to be “clearer, quicker and tougher”. It also makes “wilful or grossly reckless behaviour” towards a pension scheme a criminal offence with a prison sentence of up to seven years, but this is just grandstanding.
We need tough and transparent new laws to properly protect pension scheme members. Pension liabilities and deficits should be measured against market bond yields, and all companies should have to reach 100 per cent funding within a set number of years, with shorter periods to reach 80 per cent and 90 per cent.
Most importantly, government must be prepared to back the regulator to the hilt when it makes “unpopular” decisions, as opposed to the current shilly-shallying.