How BHS administration affects staff pensions: what you need to know
The Pension Protection Fund (PPF) has started to assess the BHS pension scheme, following the retailer’s collapse this week, in a move that is likely to see it take responsibility for the final salary pensions of some 20,000 existing and former employees.
The BHS pension scheme currently has a deficit of £571m.
- For information on your rights as a BHS shopper, see BHS goes into administration: what it means for you.
I’ve got a BHS final salary pension. What does its administration mean for me?
Only members of the BHS final salary (defined benefit) scheme will be able to claim under the PPF.
The final salary scheme was closed to new members more than 10 years ago and currently less than one in 10 employees is still a member of this scheme.
Tom McPhail, head of retirement policy at Hargreaves Lansdown says: “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.
“Under the rules of the PPF scheme, retired members will continue to receive 100% of their existing pension; however new retirees will now only receive 90% of their entitlement, capped at £33,678.38. This means higher earners could receive less than 90% of their pension entitlement. Over time members’ payouts will also now receive lower inflationary increases, meaning the value of their pensions may diminish in real terms.”
- Read our Guide to final salary pensions.
However, as yet it is unclear how long it will take for the PPF to take on responsibility for the scheme.
Mr McPhail adds: “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.”
I’ve got a BHS defined contribution pension. What does its administration mean for me?
The majority of employees will have defined contribution pensions, which will not be directly affected by the collapse of BHS as the money is invested separately.
- Read our Guide to workplace pensions.
What is the Pension Protection Fund?
The PPF was launched in April 2005 following concerns that if a company with a final salary pension collapsed and became unable to meet its pension liabilities the members of the scheme would lose their retirement income.
However, the limitations of the PPF mean that while retired employees who are already in receipt of their pensions will have all their payments covered, those that are yet to retire will see their incomes cut.
Does the Pension Protection Fund have enough money to pay for BHS pensions?
Contrary to popular belief, the PPF is funded by an annual levy on defined benefit pension schemes and has no direct support from the taxpayer. Mr McPhail says that if it was ever to start running out of money it could increase the levies it charges pension schemes or reduce the payouts it provides.
“The Protection Fund is currently in surplus, with around 115% 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 government’s Work and Pensions Committee is also looking into the PPF and the effect that the BHS collapse will have on it.
Frank Field MP and committee chair says: “We need as a Committee to look at the Pension Protection Fund and how the receipt of pension liabilities of BHS will impact on the increases in the levy that will now be placed on all other eligible employers to finance the scheme. We will then need to judge whether the law is strong enough to protect future pensioners’ contracts in occupational schemes."
Mr McPhail adds: “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.”
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.
Defined benefit pension
Often referred to as a “final salary” pension, benefits paid in retirement are known in advance and are “defined” when the employee joins the scheme. Benefits are based on the employee’s salary history and length of service rather than on investment returns. The risk is with the employer because, as long as the employee contributes a fixed percentage of salary every month, all costs of meeting the defined benefits are the responsibility of the employer. (See also Final Salary).