When BHS made the headlines for its pension scheme rather than its collapse, it highlighted the ticking time bomb for the whole of retail.
This comes from the collision of two basic facts: first, the sheer numbers historically employed in retail and, secondly, the squeeze on traditional retail business models.
The fact that retail has been the UK’s largest private employer guarantees we will face the final bill of making lifetime payment promises, often when the true cost of those promises were not really understood.
“The traditional route out of these unfunded promises was to keep expanding, but we have now seen the end of the bricks-and-mortar race for growth”
Other industries are ahead of this, such as coal, steel and airlines. British Airways has been famously described as a pension scheme with an airline attached – given that BA’s market cap of £13bn is dwarfed by the £24bn of assets in the pension scheme, which dates back to 1948.
The traditional route out of these unfunded promises was to keep expanding, but we have now seen the end of the bricks-and-mortar race for growth. So reality descends as fewer people work in retail, as the BRC has warned, less able to support the bill for those still owed pensions.
We are now seeing these maths combined with the relentless pressure on retail business models from cost growth, channel shift and sluggish top lines, sparking imminent crises that people thought were years away.
So what does this mean for the industry?
Squaring the circle
First, we will all have to pay a lot more attention to managing the widespread deficits, not only shutting defined benefit schemes, which are the real black holes, but also cutting existing deficits, as John Lewis Partnership has done – reducing its deficit from £1.5bn to £250m, by more funding and investing differently.
Scarily, even then the accounting deficit for JLP remains over £1bn, which highlights the need to constantly reduce the real cash liability, and that often means more investment diverted from other needs of the business. I am very glad Debenhams has a scheme in surplus.
“When Bismarck created the world’s first state pension, it paid out at 70, when most people died at 53; and the US pension act of 1935 established pensions at 65, when people tended to die at 58”
Secondly, this changes the landscape for M&As, as we have seen this week with engineering group GKN, where pensions are a key issue.
People will not look at rescue deals where the pension costs are unmanageable, and so more businesses will go bust, and conversely businesses with pension surpluses will look more attractive. Pension trustees and the regulator will be arbiters of future deals.
Finally, the awakening realisation of how fantastically expensive a lifetime pension promise is to fund in a low-interest and long-life-expectancy world will have to be reflected in costs to business and payments by all of us.
When Bismarck created the world’s first state pension, it paid out at 70, when most people died at 53. And the US pension act of 1935 established pensions at 65, when people tended to die at 58.
I became a pensioner in 2015 on leaving Kingfisher and I aim to emulate my parents – Shell pensioners aged 88 and 83 – so that is a 30-year horizon for the scheme.
The reality is that retail will have to pay more, employees will have to contribute more from current earnings, and probably retail employment will decline even faster as the true lifetime cost of employing people becomes clearer.
One final, slightly cheerier, thought is that life expectancy rising means we can and will have to work for longer than previous generations, and from my time at B&Q I have seen the fantastic contribution the older worker can make – so start planning to hire more pensioners.