Pedestrians walk past the boarded up window displays at the closed down former British Home Stores (BHS) store on Oxford Street in London, U.K., on Thursday, Oct. 27, 2016. Multiple reports show consumer confidence falling and a weakening of households’ spending power likely leading to a jump in inflation, which some economists see reaching 3 percent next year. Photographer: Simon Dawson/Bloomberg
The pensions regulator has been branded 'reactive' and 'slow moving' following the collapse of retail chain BHS © Bloomberg

The UK government has resisted calls to force companies to obtain clearance from the pensions regulator before doing corporate deals, as it unveiled proposals to sustain the £1.5tn final salary pensions sector.

In a green paper published on Monday, the government said introducing a blanket requirement for companies to receive the regulator’s approval before they engage in mergers or acquisitions would be “disproportionate” and could lead to companies going bust if dealmaking was impeded.

The government had faced calls to widen the regulator’s powers following last year’s high-profile collapse of BHS, which left 20,000 former workers at the retail chain facing cuts to their retirement income.

Sir Philip Green, the billionaire former owner of BHS, was not required to obtain regulatory approval before selling the retail chain for £1 in 2015, even though the BHS pension scheme had a significant deficit.

In Monday’s green paper, which is out for consultation, the government said it would consider introducing a more limited clearance regime, but warned that could be problematic.

“We would need to proceed with caution here, as the introduction of compulsory clearance even in the most limited of circumstances could increase the risks to members of pension schemes falling into the Pension Protection Fund,” the government said in the paper.

The government added that it was “interested” in exploring the case for punitive fines against employers not meeting their pension obligations, as recommended by MPs on the work and pensions select committee.

“We particularly welcome the government’s decision to consult on the option of adding the nuclear deterrent of punitive fines to the regulator’s arsenal of enforcement powers,” Frank Field, the Labour MP who chairs the committee, said on Monday.

“While noting the government’s concerns about the threat of such fines inhibiting investment activity, the point of a charge big enough to act as a deterrent is that it would never need to be used,” Mr Field added.

The 103-page green paper found little evidence that defined benefit, or final salary pensions, were “unaffordable” for employers, even though pension deficits reached record levels in 2016 due to Brexit-related market volatility. Instead, the government said in the paper that some employers may be able to go further to reduce their pension deficits more quickly.

But despite not finding “systemic issues” among the UK’s 6,000 private sector defined benefit schemes, the paper put forward proposals to ease cost pressures on the most “stressed” schemes and employers.

“While we do not believe a case has been made for across the board reductions in benefits paid by [defined benefit] schemes, there may be a case for changing the arrangements for stressed schemes and sponsors, which will help to preserve value and jobs in the economy, while also delivering a good deal for members,” the government said in the paper.

Among the proposals to ease the burden on employers were controversial plans to allow schemes to temporarily suspend pension increases, or to switch to less-generous inflation rises — a move considered by the coalition government in 2010, but dropped over concerns it would erode trust in pensions.

Kate Smith, head of pensions with Aegon, warned that while using CPI indexation, rather than RPI indexation, would reduce employers’ costs, it would “also cut pensioners’ future benefits”.

“To avoid a moral hazard we strongly believe that employers [and] trustees should only be allowed to cut future pension increases if the sponsoring employer and their scheme meet stringent requirements set out in legislation, with each case approved by the pensions regulator,” she added.

The green paper also floated proposals to relax rules to enable solvent employers to separate their pension schemes from their businesses — a strategy being pursued by Tata’s £15bn pension scheme.

The consultation closes on May 14.

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