‘Those who cannot remember the past are condemned to repeat it’ is apparently the correct version of George Santayana’s comment, sometimes attributed to Churchill. The present scandal surrounding BHS, its pension fund, Sir Philip Green, Dominic Chappell and, for that matter, the Pension Protection Fund have very close parallels with the most significant British bankruptcy of the last decade – Rover. The company changed hands a number of times, in its dying days it was sold to a ‘rescuer’ for £10, and duly went bust leaving a pension deficit estimated to be about £500m which found its way to the Pension Protection Fund.
In both cases, the employer was in decline, and the pension fund was in deficit. Companies now realise that final salary pension schemes are virtually unaffordable. Average life expectancy for a man in the 1930s was about 60, and that had risen to 65 by the 1950s and to 68 in 1971 but is now over 80 for a man. In the 1970s therefore a pension fund would think of providing for three years of retirement, but now must look to 15 years or more.
This means that companies that were operating in 1950 and are still doing so probably have a long tail of pensioners, whose fund is inadequate and generally has to be made up out of current profits. In effect the long-lived company has a tiger by the tail. Eventually the pension fund may grow to be bigger than the employer company. If the company, however, is in decline, and profits are dropping, the tiger may win. This risk can engender a desire to hand over the company before the tiger jumps. Rover serves to illustrate the point.
Rover was the rump of the British car manufacturing behemoth first put together by William Morris (Lord Nuffield) which eventually was taken into government ownership in 1975. After much restructuring it still owned Rover, Land Rover, MG and Austin-Morris, which were sold to British Aerospace as the Rover Group in 1988. British Aerospace sold the company on to BMW for £800m in 1994.
BMW decided to redevelop the Mini, which has remained with them ever since, but could not make Rover profitable and in May 2000 they carved out Land Rover as well, and sold that to Ford for a reported €3bn. BMW then sold what was left to a four-man team, the Phoenix consortium, for £10.
Phoenix notched up losses every year on Rover cars, and after unsuccessful attempts to find new partners, it went into liquidation in April 2005, putting out of work 6,000 employees. At the time, the Financial Times observed that ‘Rover is not a viable business and has not been for many years’. As it happens, the press did not home in on BMW for selling Rover to the ‘Phoenix Four’ but focused on the money the Four had paid themselves, suggesting that they had between them removed £40m from the company in salaries, pension contributions and bonuses.
The government commissioned a report into the demise of Rover, which confirmed the sums that had gone to the Four, but although this was referred to the Serious Fraud Office, no prosecution was pursued. Peter Mandelson, then the minister responsible, instituted proceedings to disqualify the four from acting as directors. The pension liability was passed to the then new Pension Protection Fund, the largest it had had to absorb up to that point.
There are many parallels between the Rover case and the BHS case. They both highlight that although business and government have tried to manage the problem of unsustainable pension schemes, no good solution has yet been found. The underlying problem of the clash between declining profits and growing pension needs only comes under the spotlight when a sickly company finally dies. The size of the pension deficit may well discourage potential saviours of such companies at an earlier stage. It could make economic sense to develop a mechanism where the employer company could be separated from the pension scheme earlier than at present, and more easily, and temporarily at least. This would give a better chance for the company to be restructured and, if possible, come back to profitability and avoid the wholesale destruction of value that occurs in liquidation.
