Over the past 12 months three pension stories, BHS, Tata Steel and Hoover have been making headlines. Each story is different but ultimately has a similar outcome.
In this article, we have looked at the less publicised Hoover story and given our thoughts as to whether the outcome will have an everlasting impact on pensions in the UK.
So, what is so special about this story? Well, in June this year, a deal was struck between the Pensions Regulator (tPR) and Hoover to transfer Hoover’s defined benefit pension scheme into the Pension Protection Fund (PPF). The deal was unusual as Hoover was solvent.
The PPF – a reminder of why it was created
In 2002, Allied Steel and Wire became insolvent and at the same time its defined benefit scheme had a huge deficit. With no employer to support the scheme, thousands of workers, ex-workers and pensioners either lost some all or of their pension.
The PPF was consequently put in place to stop this situation ever happening again and it is ultimately a safety net for members of underfunded defined benefit schemes whose sponsoring employer has become insolvent.
So tPR making deals to allow solvent employers to offload their pension obligations to the PPF is unusual, so we know the situation at Hoover must have been critical.
What was the Hoover deal?
The Hoover 1987 Pension Scheme (the Scheme) had a deficit of over £300m. Hoover, the Scheme’s sponsoring employer, was struggling and could no longer support the Scheme and if they could not remove themselves from their obligations, they stated they would become insolvent and the remaining 500 or so workers in the UK will lose their jobs.
Following discussions with all parties and after careful consideration, tPR stepped in and agreed to a regulated apportionment arrangement with Hoover. This meant that the PPF would take on the Scheme’s liabilities in return for Hoover giving the PPF a £60m payment and a 33% share in the Hoover business. This would allow Hoover to continue and safeguard the jobs of the 500 or so Hoover workers in the UK. The £60m payment was a better outcome for the PPF compared to Hoover becoming insolvent and the 33% stake in the Hoover business was put in place as an anti-embarrassment clause for the PPF in case the Hoover business has a huge turnaround in fortune.
What about the members?
So, what did this mean for the 5,000 plus pensioners and 2,000 members who have yet to retire from the Scheme? PPF compensation that’s what. For those above the Scheme’s normal retirement age, they are protected, but will see their future annual increases reduced. For those below the Scheme’s normal retirement age, they will receive an immediate 10% reduction to their Scheme benefits in addition to reduce annual increases.
Is this fair?
Many would argue no, but it appears that whatever scenario you look at with this case, Scheme members would get PPF compensation whatever the outcome.
How did this happen?
The underlying factors as to why some employers can no longer support their defined benefit pension schemes have not happened overnight. It can be argued that when financial conditions were healthier, employers did not contribute enough money into these schemes and since the credit crunch in 2007/08 we have remained in a low interest rate environment which isn’t good for defined benefit pension schemes. The fact that people are living longer and therefore pension schemes are costlier to run than first anticipated is also a reason, along with the increase in guarantees the government has added on to pension benefits over the last 20 years or so.
Whatever, the reasons, we are seeing situations like this happen more frequently. As with the similar case at Tata Steel, the reduction in the members’ pension benefits appears to be subsidising the continuation of the employer.
Unfortunately, we expect to see more of these types of cases in the future, which is obviously not good news for defined benefit scheme members. However, when you put in perspective that there are around 6,000 defined benefit schemes in the UK, many of which are well run and backed by strong employers, in my opinion the actual numbers will be relatively small.
Stuart Price
stuart.price@quantumadvisory.co.uk