Will the BHS fallout ring alarm bells across the corporate sector?
FTSE companies come and go, but the failure of retailer British Home Stores a year after being sold for a pound is likely to become a watershed moment in UK pensions.
Businesses will fail and the Pension Protection Fund is there to protect members. But it is not the fact BHS has failed that has caused such consternation, rather the circumstances surrounding the failure.
So far, so good
BHS had been struggling for some years prior to entering administration and had not recorded a profit since 2008, while the deficits in its two defined benefit pension schemes had increased significantly.
Such a long recovery plan is not very common, but they do occur where a company says they do not have the money to do it shorter and to do so would lead to liquidation
What is clear is that from 2000, when Philip Green acquired BHS for £200m, it was in profit. After the last posted profit in 2008, there followed a six-year decline.
Black hole
This is where things started to look bad for the pension funds. Although much of the coverage has focused on a figure of £571m as the black hole facing the roughly 22,600-member BHS Pension Scheme and BHS Senior Management Scheme, this is a recent estimate of a buyout figure.
The latest figure – from 2012, as the 2015 triennial valuation is not yet complete – showed a combined deficit of £233m on an ongoing basis.
In 2012, a recovery plan of 23 years was agreed between BHS and the trustees with annual deficit contributions of £9.5m, which many have claimed is not only exceptional, but excessive. Yet such an assertion is not necessarily a fair appraisal of the system faced by the trustees.
“Such a long recovery plan is not very common,” says Judith Donnelly, a partner at Squire Patton Boggs, “but they do occur where a company says they do not have the money to do it shorter and to do so would lead to liquidation.”
In such circumstances a trustee board may feel it is a better situation for members than triggering a wind-up.
By late 2014, BHS’s performance had continued to decline, and with the sponsor’s reducing covenant strength the trustees derisked the investment strategy, reducing the equity allocation and introducing liability-driven investment.
By the book
The trustees have attracted some criticism not only for the length of the recovery period agreed, but for a late conversion to LDI. However, a paper by Richard Jones and Martin Hunter from Punter Southall Transaction Services says the trustees’ actions were in line with current Pensions Regulator guidance regarding integrating the strength of the employer covenant into decisions on investment strategy, as well as funding.
“This is something of a hot topic for the regulator at the moment, as some recent statements have suggested TPR feels many have not done enough to reflect this in their investment decisions by moving to less risky assets,” says the paper.
“Instead, many schemes have sought to retain a material allocation to return-seeking asset classes, in the hope that this will ultimately help to return them to full funding, particularly where there are significant affordability constraints on the employer.”
Fighting in public
The BHS story has made the headlines not only for the store’s cultural significance to the British high street, but for the soap opera that has unfolded in the press following the investigation launched by the Work and Pensions Committee.
Green called for the committee’s chair, Frank Field, to step down after the MP suggested ministers should consider stripping the retail magnate of his knighthood for his part in the affair.
“I am horrified that Frank Field is prepared to make comments like this in public,” said Green in a statement. “Clearly he has already made his decision as to what he feels the punishment should be without even hearing any evidence from anybody about BHS or the circumstances of the past 15 years.”
Heavy hitters
Alan Rubenstein, chief executive of the Pension Protection Fund, gave evidence to the committee, but it was the Pensions Regulator’s chief executive Lesley Titcomb whose appearance seemed to generate more questions than it answered.
Members of the committee were dissatisfied at the progress made by the regulator’s ongoing investigation.
Richard Fuller MP said to Titcomb: “You are not much of a regulator, are you?”
Titcomb answered: “We have to operate within the framework provided to us.”
Adam Goldman, Arcadia’s company secretary, challenged some of the evidence delivered by Rubenstein and Titcomb in a letter to the committee, which in turn provoked a clarification from the regulator.
Donnelly says the regulator was not involved in the transaction because clearance was not applied for.
“Clearance should be sought if the transaction is likely to have a detrimental effect upon the ability of the sponsor to pay its contributions,” says Donnelly, “but it may have been seen as a white knight and not likely to be detrimental in and of itself as it wasn’t a leveraged sale.”
More to come
What is clear is that nothing will be decided any time soon. Green is scheduled to appear before the committee on June 15 and Lord Paul Myners – who wrestled with Green to retain control of Marks & Spencer – will lead his questioning.
Meanwhile the regulator’s investigation continues, and it is unclear how long that will take.
David Weeks, co-chair of the Association of Member Nominated Trustees, says: “The select committee asked questions that do not appear to have immediate or definitive answers. Trustees will want to know in advance if the inquiry is going to point to new responsibilities that they must assume.”
He adds: “The AMNT would welcome the opportunity to give evidence to the select committee.”
Wait and see
CMS Cameron McKenna partner Neil Smith says that without a definitive decision, any corporate action is likely to be slowed down and will create extra work for sponsors and schemes, but there is work that can be done to improve governance.
“Most large schemes will have information protocols in place and be aware immediately of any potential corporate activity,” says Smith. “Those that do not may feel compelled to put them in place in the very near future.”
The story is not over yet. That both PPF and the regulator rejected proposed solutions for the scheme suggests they may have their eye on getting more money from somewhere. Whether they will succeed, only time will tell.
Pádraig Floyd is a freelance journalist