06 July 2017 - Post by:Caroline Overton
The settlement agreement reached in relation to the BHS pension schemes, followed by the publication last week of the Pensions Regulator’s regulatory intervention report, may mark the end of the long-running, high-profile BHS pensions saga. This is therefore an appropriate moment to take a step back and consider what these milestones mean in practice.
So, firstly, what is the status of the Regulator’s report? Section 89 of the Pensions Act 2004 gives the Regulator the discretion to publish, in an appropriate form and manner, a report of the consideration it has given to the exercise of its functions in a particular case. Given the critical and long-running tabloid coverage of the case, it is perhaps not surprising that the Regulator chose to publish a report on this matter. The report sheds some light on the way that the Regulator approaches its statutory powers in practice, and how it may play its hand differently in future.
The report contains something of a post-mortem of instances where the Regulator acknowledges that it could have been quicker and more proactive in its responses. These include the protracted funding discussions that took place in the years before the disposal of BHS to Retail Acquisitions. The report states that the Regulator is now committed to making greater use of its powers around scheme funding – an area where critics have suggested that its bark is worse than its bite. How this will play out in practice remains to be seen, although the Regulator’s recent Green Paper response makes a couple of suggestions – in particular, it suggests that clearer definitions around ‘prudence’ and ‘appropriateness’ in scheme funding legislation, and the introduction of a ‘comply or explain’ regime in relation to funding parameters, would provide greater clarity and support to sponsors and trustees.
The Regulator conceded to the Select Committee that it only found out about the sale of BHS to Retail Acquisitions from the Sunday newspapers. The report makes clear that it had in fact been actively working with the trustees throughout this period to try to gain more information from the sponsoring group. This raises questions as to whether the notifiable events framework operates as intended – the Regulator should be notified of a decision to relinquish control of the employer of an underfunded scheme as soon as it is made. It may well be that enhanced information-gathering powers for the Regulator, which are suggested in both the s.89 report and the Green Paper response, could be the most workable means of ensuring that the Regulator is not caught out by corporate developments.
The report also includes a brief overview of the contents of the Warning Notices issued to Philip Green and to entities within his corporate group. The Regulator must consider it ‘reasonable’ to exercise its moral hazard powers, but legislation only contains non-exhaustive factors indicating what might constitute reasonableness. An interesting consideration is the emphasis on the involvement that Philip Green and his corporate group had in BHS after their disposal of the entity. This continued involvement extended beyond the management of the entity and into pension scheme funding issues, and seems to have been a key factor in the Regulator’s assessment of reasonableness.
Interestingly, this s.89 report was published before the matter was fully resolved. Separate action is still ongoing against Dominic Chappell and Retail Acquisitions Limited. It was on their watch that BHS went into administration. The report is deliberately silent on this investigation. However, it seems likely that the Regulator is simultaneously exploring both the prospect of settlement and the exercise of its moral hazard powers, and that any outcome from this ongoing investigation would involve increasing the security of member benefits for those members who choose to transfer to the new BHS pension schemes. The apportionment of liability between non-connected parties in the exercise of the Regulator’s moral hazard powers is an area which has been hotly contested on previous occasions, and so it will be interesting to see what, if any, consideration around this issue is published in future.
Caroline Overton is a senior associate at Allen & Overy LLP.