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Plugging the Arcadia pension fund gap

Following the collapse of the Arcadia group roughly 13,000 employees are considering the security of their pensions yet the group has reported a £350m deficit in the ‘pot’ of its defined benefit pension scheme.

This fact was made all the more troubling considering Arcadia’s connection to the BHS pension saga, another failed retail empire built by Sir Philip Green.

Stephen Timms, the chair of the Work and Pension Committee, has recently called for Green to personally pay the Arcadia deficit. This is a call made on a moral basis and no doubt a reflection of Green’s ethically questionable approach to the BHS debacle, which ultimately saw the Green family hand over £363m to rescue the BHS scheme.

Protecting benefits

The trustees of a defined benefit pension scheme sit separately from the employer and are responsible for running the scheme and protecting the benefits. One of their key roles is to ensure that the scheme meets the statutory funding objective (SFO) – meaning it has enough assets to pay each employee their pension when it’s due.

Eliminating deficits

A deficit can happen to a company regardless of its profitability and can arise due to various factors, such as underfunding the scheme, increased life expectancy of employees and under-performing investments or currencies. But it often is a sign that a company is struggling financially.

If there is a deficit, and the employer cannot meet the SFO, the trustees and employer must agree on a recovery plan to eliminate the deficit. The Scheme Funding Regulations require the trustees and the employer to reach an agreement within 15 months, with provision for the Regulator to become involved if required, to see if a resolution is possible.

As with BHS, one option for the Arcadia pensions black hole could be for the Green family to ‘plug the gap’. While it may not be required, the regulator does have the power to impose a schedule of contributions – meaning it could, in theory, require Sir Philip to contribute to the scheme.

The Pension Protection Fund

With Arcadia going into administration, the staff pensions may transfer to the Pension Protection Fund (PPF) – an organisation which protects members of defined benefit (final salary) pension schemes by paying compensation to them in place of their pension when their employer has become insolvent.

The PPF does not take on a pension scheme as soon as an organisation becomes insolvent. Rather, it undertakes an assessment period that involves valuing the scheme to ascertain whether it has sufficient assets to secure the PPF’s standard benefits level. This takes on average two years.

It’s important to note that if successful, this process does not necessarily guarantee claimants their full pension entitlement. People who are already receiving pension payments will receive their full payments subject to caveats. And those who are not receiving their pension yet will receive 90%, set to an annual cap of £37,315.

What’s next?

It is not clear how long it will be before the employees of Arcadia know the certainty of their future, and, from a purely legal perspective, it’s not yet obvious whether the Greens’ are at fault. The company, Arcadia, is responsible for maintaining the financial health of the pension scheme.

However, considering that the Greens themselves extracted an infamous £1.2bn dividend from Arcadia in 2005, which many say precipitated the financial decline, the court of public opinion may demand the deficit to be paid by the Greens’ personally – regardless of legal obligation.

Robin Ford is an employment lawyer from Capital Law

Further reading:

Employees underestimating the importance of a pension

Why HR needs to support young employees’ pension plans

Shutting up shop: HR on the high street