Arcadia collapse: plugging the pension gap

It’s well documented that Arcadia has been experiencing financial difficulty during the pandemic. However, comments by Jane Shepherdson CBE, a previous boss of Topshop, told BBC’s World at One Programme that the group’s problems extend beyond the pandemic.

There have been reports of a £350 million deficit in the group’s pension fund which has approximately 10,000 members. Stephen Timms, the chair of the Work and Pension Committee, has recently called for the Greens’ to personally pay the deficit. This is a call to help made on a moral basis.

The trustees of a defined benefit pension scheme, who are separate from the employer and responsible for running the scheme and protecting the benefits, must ensure the scheme meets the statutory funding objective (SFO). The SFO requires that an occupational pension scheme has sufficient assets to cover its technical provisions. Essentially, this means the current discounted capital value of the future liabilities.

If there is a deficit, and the employer cannot meet the SFO, the trustees and employer must agree on a recovery plan. A recovery plan must aim to eliminate the deficit so that the scheme meets the SFO. The Scheme Funding Regulations require the trustees and the employers to reach an agreement over the key scheme funding decisions, with provision for the Regulator to become involved if this cannot be reached. The trustees will take a view on the scheme’s funding position and the contributions agreement will be subject to the rules of the scheme.

If the trustees cannot reach an agreement with Arcadia, in a process that can take up to 15 months, the trustees will have to report this to the Pensions Regulator. The Regulator can then try to engage the parties to see if a resolution is possible. One such option could be for the Greens’ to ‘plug the gap’. Whilst the regulator will not always intervene, it does have the power to impose a schedule of contributions. This means it could, in theory, require Arcadia to contribute to the scheme.

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.

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 process takes on average around two years. More information on this can be found here.

It’s also important to note that the PPF taking over a scheme does not necessarily guarantee someone getting their full pension entitlement. People who are already receiving pension payments will receive their full pension payments subject to caveats. Those who are not receiving their pension yet, will receive 90% of their pension promise. There is currently a cap on the amount a person can receive via the PPF, set at £37,315 per annum.

It’s not clear how long it will be before the employees of Arcadia know the certainty of their future. Sir Philip and Lady Cristina Green are likely to come under further pressure to personally account for the scheme, even if only on a moral basis. There are alternative resolutions if they fail to do so, but this will take time and does not guarantee full pensions for all employees.