Prem Sikka wants pension schemes protection from bosses in the wake of the BHS saga
There is an unresolved tension between corporations and social responsibility. People want responsible capitalism, but corporate elites resent anything that constrains their ability to extract high returns for themselves and shareholders. After the Second World War, under pressure from strong trade unions and governments keen to improve the quality of life for ordinary people, many corporations operated defined benefit (DB) pension schemes. These guaranteed a certain amount of pension to their workers. However, this social settlement has been weakened by the corporate quest to make profits at almost any cost. Tax avoidance has been supplemented by dilution of pension rights and outright closures. At the end of 2015, only 11 of the FTSE 250 companies operated a DB pension scheme.
Corporations are abandoning their pension responsibilities. One strategy used by directors is to ignore pension scheme solvency, extract as much cash as possible and then dump the company. This has been the case at Bhs, one of the UK’s biggest retailers.
Bhs entered liquidation on 2 June 2016. Its 2014 accounts showed a pension scheme deficit of £139m even though employees paid all their contributions.
Bhs pension scheme had been in deficit for all years from 2003 to 2014, with the exception of 2008. For an insolvent company, obligations due to a pension scheme rank as unsecured creditors i.e. they are only paid after secured creditors (e.g. banks) have been paid. The only real possibility of rescue for Bhs pension scheme is an insurance company buyout, which would require an injection of about £550m. The chances of this, or any amount, coming from liquidation are zero. Some 20,000 Bhs past and present employees are facing massive cuts to their pension rights.
How did Bhs get into this state? Sir Philip Green bought Bhs for £200m in May 2000 and sold it for £1 in March 2015. Between 2001 and 2008, Bhs reported profits of £498m and losses of £416m from 2009 to 2014. The overall profit for the entire period was only £82m. It paid dividends of £423 million during the period 2002 to 2004 even though the pension scheme was in deficit for 2003 and 2004. Bhs directors used a variety of intragroup transactions and creative strategies to extract returns. Altogether, Bhs may have generated over £930m for the Green family. Despite the extraction of high returns and a consistent failure to address pension scheme deficits, the auditors did not raise any red flags. The Pensions Regulator did not express any displeasure.
In a lax regulatory environment, other companies are also ignoring pension scheme obligations. A June 2016 report by investment advisors AJ Bell showed that 54 of the FTSE100 companies with a pension scheme deficit paid £48bn in dividends in 2014 and in 2015. In 2014, the same companies had £52bn deficit on their pension schemes. The dividends paid by 35 of the FTSE100 companies were bigger than their pension scheme deficits. In 2014, Royal Dutch Shell had a pension scheme deficit of £6.7bn, but paid out dividends of £7.5bn and £8bn in 2014 and 2015. AstraZeneca had a deficit of £1.87bn in 2014, but paid dividend of £2.2bn and £2.4bn in 2014 and 2015. British American Tobacco had a deficit of £628m, but paid £2.8bn and £2.9bn as dividends in 2014 and 2015. Vodafone had a deficit of £549m but paid dividends of £3bn and £3.04bn for 2014 and 2015. The directors’ preferences are self-evident.
The above state of affairs is the result of deliberate choices made by company directors. They have neglected employee interests and prioritised shareholders. One might look to the government to compel corporations to honour their pension obligations, but that is not so. Tata Steel is trying to sell its UK business. Potential buyers are concerned about the £485 million pension scheme deficit. So the government is proposing to introduce legislation to dilute pension scheme members’ rights which will hit thousands of past and present employees. Anything done here has implications for DB pension scheme members elsewhere.
Workers, past and present, need to make a common cause to protect their pensions and demand reforms. A key requirement is to disrupt the neglect of pension schemes from within and outside the corporation. Employees need to be represented in significant numbers on the boards of companies with more than 500 employees. This will enable them to challenge excessive dividends and neglect of pension scheme finances. Companies with deficits on their pension schemes should not be permitted to pay dividends. Companies with pension scheme deficits should be required to submit a plan to the Pensions Regulator explaining how they will eradicate the deficit. The Regulator should respond by approving the plan or otherwise. In the event of liquidation, pension scheme should rank as a preferential creditor i.e. be paid before any creditor is paid.