Sir Philip Green, the British businessman, has just paid £363m so that, in his words, the 19,000 BHS pension scheme members can “achieve a significantly better outcome” than compensation from the Pension Protection Fund, the lifeboat for failed retirement schemes.

Is this really a good deal for BHS pension scheme members?

BHS, the department store chain owned by Sir Philip for 15 years, went bust in March 2016 with a very large pension deficit. This came one year after a company controlled by Sir Philip’s family sold it for £1 to a company with no record.

As part of the recent settlement recently agreed by Sir Philip, the pensions regulator has dropped all legal action against him.

The £363m will be paid into a new BHS scheme, and members can transfer their existing pensions. The deal is OK for the 19,000 scheme members when compared with PPF compensation, but no more than OK.

Of the 7,000 current pensioners, those who joined before 1997 will get higher annual inflation increases — 1.8 per cent fixed — versus no increases from the PPF. But for those who joined after 1997 the increases are the same.

Around 3,000 members who have not yet retired will also be better off because of higher inflation increases than the PPF, and their starting pensions won’t be cut back at retirement as in the PPF.

But the 9,000 members who have not yet retired, who are due to draw less than £900 annually in retirement, are being offered a tempting “windup lump sum” to give up their pension. They will lose around 10 per cent compared with what they would have received under the PPF.

The savings from this financial engineering will be refunded to Sir Philip. He could choose to forego the refund and give those 9,000 BHS staffers a higher cash lump sum so they are no worse off than they would have been under the PPF.

There are 10 highly paid members of the BHS senior scheme who would have seen their starting pension capped at around £33,000 under the PPF. In the new BHS scheme they will certainly have “a significantly better outcome”, as they will now get their full starting pension, which is much higher.

The bad news is that every one of the 19,000 members will get less than their full pension promise — an average loss of 12 per cent according to the pensions regulator — because the new scheme’s annual inflation increases are lower than the promised increases under the retail prices index.

Is it a good deal for the PPF?

The £363m payment certainly beats Sir Philip’s first reported offer of just £80m, and is more than the overall loss the PPF would have suffered by absorbing the scheme.

The alternative to the settlement is complex legal action that could drag on for years, and although Sir Philip is portrayed as the pantomime villain — complete with a brand-new super yacht — the courts may not have enforced any legal claim.

Although the new BHS scheme has no company standing behind it to underwrite any shortfalls, unlike other “zombie” schemes it starts off in surplus.

It is sustainable for the long run, with minimal risk to the PPF, if the trustees run a low-risk investment strategy, matching pension liabilities with long-dated bonds, keep costs down to the bone and manage longevity risk.

The PPF’s robust new rules for dealing with zombie schemes mean if the new BHS scheme’s assets started to fall towards the minimum required, it would be wound up quickly, before the pension scheme lifeboat faced any loss.

The BHS pension debacle has shown up the fundamental weaknesses in UK pension regulation, which go back to the 2004 Pensions Act.

The minimum funding requirement, set up in 1995, required companies to measure their pension liabilities consistently and to plug deficits over set periods.

When the Labour government reviewed the minimum funding requirement, it ignored the carefully crafted Institute of Actuaries report recommending the legal standard should be strengthened. Instead it was replaced with the “scheme-specific funding standard” in the Pensions Act of 2004.

The Conservative government’s recently published green paper on defined benefit pension schemes sadly shows few signs that pension regulation will be strengthened and clarified anytime soon.

John Ralfe is an independent pension consultant

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