The UK’s Pensions Regulator (TPR) was given contradictory and incompatible objectives when it was required to balance the security of pension savings against the growth of sponsoring employers, a report by the Pensions Institute has warned.
Report author Keith Wallace, examining instances where sponsors sidestepped deficit-reduction payments or exploited pension funds for financial gain – including cases of apparent mergers where sponsors siphoned off the scheme’s surplus – said it was naïve to assume such practices were now in the past, given the current level of underfunding.
Wallace cited high dividend payments, high-interest loans and management fees payable to sponsors as ways of sidestepping deficit payments, with some of the methods being employed by the sponsors of the underfunded BHS pension schemes, which have since entered the Pension Protection Fund (PPF).
A report by the parliamentary work and pensions committee last month argued that the BHS schemes had been weakened prior to its insolvency by the company’s management.
“The Pension Protection Fund faces a huge moral hazard as a result of the practices employed by some companies in this country,” warned Wallace, who is also president of the Association of Corporate Trustees.
A pension scheme is like a coach and horses carrying gold on a long journey through hostile territory in a Wild West movie.
In the report, ‘Milking and Dumping: The Devices Businesses Use to Exploit Surpluses and Shed Deficits’, Wallace argues that TPR was an ineffective regulator due to its conflicting mission statements of protecting schemes while ensuring a sponsor’s solvency.
“In practice, the muddled role saps trustees’ negotiating stance and gives them a moral ‘let out’, a sense of helplessness, or both,” he said.
“Were there no TPR role here, negotiations between trustees and sponsors might be more acute, but beneficiaries would know clearly where the buck stopped.”
TPR’s obligation to balance a scheme’s deficit-reduction payments were made more explicit in 2012, when a new statutory objective to account for sponsor growth was agreed.
Wallace contrasted TPR’s objectives with those of the PPF, which he said were clearer, with the lifeboat scheme showing “every appearance” it would be able to meet them.
The report continues: “Where there is some latent moral hazard, though, is in the very existence of the PPF and the harbour it offers.”
Wallace, arguing that the existence of PPF guarantees allows sponsors to justify insufficient levels of contribution, adds: “It affords some lowest common denominator of acceptable benefit.”
David Blake, director of the Cass Business School-based Pensions Institute, said: “A pension scheme is like a coach and horses carrying gold on a long journey through hostile territory in a Wild West movie.
“Despite the determination of the trustees to navigate a safe journey over the rocky terrain and the bravery of the Pensions Regulator as outrider, the coach with its valuable bullion is a sitting duck for corporate ingenuity.”
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