Will new laws put an end to ‘pensions plunderers’?
By Gareth Jones
The new Pension Schemes Act includes laws to take action against company bosses who endanger company pension schemes. Why are they needed and will they work?
This year marks the 30th anniversary of the death of Robert Maxwell. The controversial businessman and media proprietor left a number of troubled legacies that are still relevant to business and public life today – the most notable perhaps concerns issues around company pensions and corporate governance.
Maxwell died in November 1991 in mysterious circumstances, with his body discovered in the Atlantic Ocean the after he had gone missing from his yacht near the Canary Islands. It was only after his death that the full extent of his criminality and recklessness became apparent. As owner of the Mirror Group, Maxwell was found to be fraudulently misappropriating the Mirror Group pension fund and using its assets to prop up his own failing businesses thank were on the brink of collapse. As his business empire went into liquidation, Mirror Group pensioners subsequently discovered that £460m at been looted from their fund and the value of their pensions had been cut in half (even with a partial government bailout).
This naturally caused considerable anger among Mirror Group employees and pensioners, but it also raised serious questions about how such activity had been allowed to happen. Maxwell’s actions were blatantly criminal and the scale of his fraud was vast, yet it had been enabled, in part, by his compliant company board (with non-execs providing little scrutiny over the company’s finances) and City advisers, who were only too willing to bank their fees despite the obvious ethical (and legal) questions over their actions.
Robert Maxwell is now largely remembered as a fraudster and a byword for ‘pensions plunderer’ – stoking fear among pensioners, scheme trustees and the wider pensions industry that other company schemes could be at the mercy of greedy or reckless bosses. Yet it became clear that many of the issues that his actions raised around the role of company pensions were not sufficiently addressed.
Fast forward two-and-a-half decades and another controversial business figure would highlight the precariousness of pension schemes in the wrong hands. Retail tycoon, Sir Philip Green owned department store BHS from 2000 to 2015, eventually selling the company for £1 to a little-known businessman, Dominic Chappell (a former racing driver and serial bankrupt) where it subsequently entered administration and was wound down. Under Green’s ownership, BHS had accumulated considerable debts, including a significant funding gap in the BHS pension scheme (which ended up in a deficit of £571 million). At the same time, it is estimated that Green and his family extracted £586 million out of the company in dividends, rental payments and interest from loans.
Green’s case is different from Maxwell’s in that Green’s actions were not regarded as criminal. Yet the questions his case raises around stewardship and corporate governance that were arguably just as serious as Maxwell’s case. After all, how did he get away with taking vast sums out of the company, allowing its pension scheme to go to the brink of collapse, before washing his hands of all responsibility by selling it to a man who was manifestly quite unfit to own or run it?
For many policymakers (including MPs on the Work and Pensions Select Committee who conducted an inquiry into BHS in 2016), this case highlighted gaps in the law and the regulatory regime. The current pension regime is largely defined by the Pensions Act 2004, which created The Pensions Regulator (TPR), a statutory body specifically focused on company DB pension schemes, and gave it powers to act against employers’ attempts to avoid meeting their pension obligations. The TPR can issue Contribution Notices (requiring a company to make a lump sum payment to a scheme) or Financial Support Directions (longer-term arrangements for scheme funding), however, Green’s case highlighted the limitations of these powers – in part, due to the grey areas when it comes to responsibilities on pensions.
The funding of a pension scheme is a shared responsibility between the sponsor company and pension scheme trustees. The trustees are responsible for the investment strategy but how the fund is funded is done through an agreement between the two parties. This agreement is typically a result of negotiation which depends on a number of factors and competing priorities. For instance, some sponsor companies may convince trustees to accept lower pension contributions in the short term as it will help the company manage its cashflow and grow in the longer-term – meaning it will be better supported in future. This situation can be exploited however, For BHS, Green’s actions here were observed to be particularly cynical, as his company refused requests from BHS pension trustees to increase contributions, arguing it was using the money instead for long-term investment in the company – before Green, who had enriched himself off its dividends, freed himself of the company (and its liabilities) in a fire sale. Furthermore, Green himself attempted to pin blame on BHS’s pension trustees for the deficit by accusing them of “stupid, stupid, idiotic mistakes” in their investment strategy.
Green’s defence won him little sympathy among policymakers and the business community. His actions were widely condemned by politicians across the political spectrum and he was labelled “the unacceptable face of capitalism” by the select committee inquiry report (Green eventually agreed a cash contribution settlement to BHS pension scheme with the regulator). The government recognised the problem and sought to address it with new legislation – the Pensions Schemes Bill – which completed its passage through Parliament and received Royal Assent earlier this month, thereby becoming an Act of Parliament.
Measures in the Pension Schemes Act seek to address the issue of personal responsibility in managing company pensions by providing the TPR with powers to issue £1 million fines against individuals (usually company bosses) who are evading pensions responsibilities. The act also creates new criminal offences aimed at those who run pension schemes into the ground, including a prison sentence of up to seven years. By toughening up the law and targeting the bosses with more severe civil and criminal punishments, it is hoped that the Act will reemphasise the issue of individual responsibility in – deterring any potential reckless and self-serving behaviour. These measures will not come into force for another few months and some of the finer details in terms of the scope of sanctions have yet to be determined – so the success of the new measures is unlikely to be known for a few years.
It is likely, however, that, concerns about treatment of pension schemes will remain for some time. Pension schemes play a sizeable role in a company’s balance sheet. Their assets and liabilities can be vast (in some cases bigger than the operating company itself) and can have a major impact on cashflow, dividends, investor perceptions and on corporate activity such as mergers and acquisitions. The temptation to disregard pension liabilities in favour of short-term (and personal) gain will always be there for shameless and disreputable company bosses -- whether done through outright criminality (in the case of Maxwell) or cynical disregard for responsibilities (in the case of Green). Addressing this in the long term is likely to involve a wider look at corporate governance, behaviour and business culture, particularly among those who enable company directors in their actions – such as non-exec board members and City advisers.