Accounting expert Prem Sikka lifts the lid on how companies asset strip pensions - and shows what needs to happen now.
Corporate boardrooms have been playing the game of ‘pension stripping’: methods which transfer wealth from employees to shareholders and executives by under-funding employee pension schemes.
Regulators do little and directors continue with the game which has deadly outcomes for employees and retirees, as their pension rights are eroded. How does it work?
The collapse of BHS left thousands employees facing a shortfall in their pension entitlement. Carillion had a deficit of over £2bn. My report to the House of Commons Work and Pensions Committee argued that directors of Bernard Matthews dumped the pension liability in order to enrich shareholders and secured creditors. The same story is being repeated daily in many other companies.
The deficit on UK’s defined benefit pension schemes is around £200bn, with FTSE350 companies carrying a deficit of £45bn. Yet repairing the deficit is not a priority for most companies. In 2017, FTSE350 companies groups contributed £8.7bn in pension deficit contributions while paying out £66bn in dividends. Such practices are the outcome of a skewed reward system.
Executive remuneration and incentive schemes (in the form of cash, shares and share options) take account of profits, dividends and share price. That creates a temptation to underfund the pension scheme, so as to boost profits and dividends. Directors are direct beneficiaries as neglect of employee pension schemes boosts the value of their shares and share options. In many companies, senior executives have a separate pension scheme just for themselves. Therefore they don’t connect with employee anxieties.
The Pension Protection Fund (PPF) funded by levies on other schemes, can rescue insolvent pension schemes, but it is only for a maximum of 90% of the deficit. A 2017 report by the Financial Times noted that PPF rescued some £3.8bn of pension liabilities dumped through pre-pack administrations alone – i.e. where directors sold off the assets of the company and abandoned their pension obligations. The net result is a cut in pension rights and hardship, especially for retired and older workers as they will have virtually no opportunity to rebuild their pension pots.
The government’s response – published in February – is that it will introduce a new criminal offence of ‘wilful or reckless behaviour’ in relation to abuse of pension schemes. The convicted executives could face up to seven years imprisonment and/or unlimited fines.
In order to successfully prosecute any executive for ‘wilful or reckless behaviour’ however, regulators will most likely have to prove that the individual knowingly or intentionally disregarded an unreasonable risk which caused substantial harm. There will inevitably be legal battles – and the UK has a poor record of tackling corporate misdemeanours. Even if a regulator secures a conviction, that won’t make the pension scheme solvent, especially if the convicted individual lacks sufficient resources.
The threat of criminal prosecutions and unlimited fines needs to be accompanied by reform of company and insolvency law. Here are a few suggestions.
What must be done
The proposed criminal remedies need to be accompanied by a number of other reforms.
1. Under Section 172 of the Companies Act 2006, directors are required to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to the interests of employees, customers, suppliers and other stakeholders. This formulation subordinates their interests to the interests of shareholders and needs to change.
2. The shareholder-centric model of corporation governance needs to be replaced by a stakeholder model with employees having significant representation on company boards so that they can object whenever their interests are harmed. Directors’ duties specified in Section 172 of the Companies Act 2006 need to be revised to recognise the interests of a plurality of stakeholders.
3.Executive remuneration practices need to be reformed. Directors must not hold shares or share options in companies as that creates temptation to underfund pension schemes. Employees should have a vote on executive pay so that they can withhold remuneration for directors neglecting the pension schemes.
4. Directors must join the same pension scheme as the rest of the employees. This will force them to directly face the consequences of underfunding the pension schemes.
5. When a company with a pension scheme wishes to pay dividend, it should be required to submit a legally binding plan to The Pensions Regulator explaining how it intends to repair the deficit. The payment of dividends should be conditional upon approval of the plan by the regulator.
6. Currently, the pension scheme of an insolvent company ranks as an unsecured creditor i.e. it is paid after secured and preferential creditors have been paid from the sale of the assets of insolvent business. In most cases, little is recovered. The insolvency laws need to be changed and pension scheme should rank as a priority creditor i.e. it needs to be paid before any other creditor.
These proposals are likely to be opposed by economic elites who have enriched themselves through ‘pension stripping’.
The government has a choice – it can inconvenience elites or inflict hardship of employees who will have little/no opportunity to rebuild their pension pot. Which side are they on?
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