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BHS: What's the real story behind the collapse of the 88-year-old department store?

Sir Philip Green suggests he has cut the cord with BHS after his £1 sale last year. But the Pensions Regulator has the power to pursuse former owners of businesses who it thinks have responsibilities to pension scheme members.

Ben Chu
Monday 25 April 2016 19:19 BST
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Sir Philip Green sold BHS for £1 in March 2015
Sir Philip Green sold BHS for £1 in March 2015

Shortly after Sir Philip Green sold BHS for £1 in March 2015 the retail magnate was at pains to stress he was no longer responsible for what happened to the venerable department store.

“If you buy my house and it falls down, is it my fault?” he asked an interviewer. “As far as I’m concerned, in terms of the actions we’ve put in place, there’s no reason they should get in trouble.”

“Now, where they get to — I’m not the driver. If I give you my plane, right, and you tell me you’re a great driver and you crash it into the first f****** mountain, is that my fault? I know what they’re getting today is 100 per cent clean.”

The BHS plane now has indeed crashed into the mountain. The firm entered administration today, putting 11,000 jobs at risk in the biggest high street bust since Woolworths went under in 2008. And yet Sir Philip’s claims last year to have washed his hands of the whole business do not seem to be strictly accurate.

The reason BHS has gone bust is no mystery. Shoppers’ tastes have shifted and fusty old BHS hasn’t kept up. According to reports filed at Companies House BHS made an annual loss of £70m in 2013.

The new owners have not been able to turnaround its fortunes. “No one is to blame. It was a combination of bad trading and not being able to raise enough money from the property portfolio” said the new BHS boss Dominic Chappell.

So why, then, is Sir Philip still in the frame? The company’s historic and generous defined benefit pension scheme is a large part of the answer. There are 20,000 members of the BHS scheme; all those current and former shop workers to whom the company made pension promises as part of the terms of their employment.

Documents released last month revealed the scheme is running a £571m deficit (on the basis of what it would cost to get an insurer to buy it out). This does not mean the scheme itself is as bust as the parent company. It simply means the present value of the scheme’s future liabilities (promised pension payouts) exceed the present value of all its financial assets (stocks and bonds).

Deficits are not uncommon for defined benefit company pension schemes. When interest rates dropped sharply around the world during the financial crisis many schemes went into deficit, largely because of the way their future liabilities are valued.

When interest rates drop future liabilities automatically rise. The picture may change dramatically if interest rates climb in the coming years. But if things remain broadly the same there will be a shortfall and pensioners will not get our all they have been promised. And that’s why businesses are under pressure to pump more money into schemes to reduce their deficits.

So what if those sponsoring businesses go bust, as is the case with BHS? What happens to the company pension scheme in those circumstances? The answer is that the state steps in. The Pension Protection Fund (PPF) is a government-run scheme to rescue the schemes of bust firms. It was established by the Government in 2004 so private sector workers don’t risk losing all their pensions if their employer happens to go under. The PPF pays full pensions to those retired but imposes a 10 per cent cut for those who retire early or remain in work. It is funded by a levy on all defined benefit schemes.

Sir Philip might have offloaded BHS but the Government's Pensions Regulator has the power to pursue former owners of businesses if it thinks they have a responsibility to members of their schemes. It was given this power so owners cannot simply sell their firms, slough off their responsibilities and force taxpayers to stump up for the pensions bill.

That means Sir Philip, who ran BHS for 15 years, is still potentially on the hook. Sir Philip has reportedly offered the Pensions Regulator and the PPF £80m towards the scheme, consisting of £40m in cash and a £40m loan from his Arcadia group to BHS (secured against BHS assets). The Pensions Regulator did not comment today on the BHS case, but it is reportedly holding out for a significantly bigger contribution.

Is this fair on Sir Philip? On the face of it might seem rather rough. He bought BHS for £200m in 2000 and he sold it for £1. On paper that’s a huge loss. And now he’s being forced to subsidise its pension scheme?

Yet his family received more than £400m in dividends from the company. And, incidentally, no UK income tax was paid on these dividends as they were paid to Sir Philip’s wife, Tina, who lives in the tax haven of Monaco. In 2012 Sir Philip and the BHS pension fund trustees also took a decision to close the pension fund deficit over 23 years. Some argue that was not good enough.

“This was always going to come back and bite him” says the independent pensions expert John Ralfe. “If [Sir Philip’s group] had put a chunky amount of money into the pension scheme before the sale it would be much more difficult now for the Pensions Regulator to come after the former owners.”

Mr Ralfe also says the Pensions Regulator was at fault for letting the BHS pensions deficit become so bloated in the first place. “The Pensions Regulator has given up regulating pensions” he says. “There have been many examples it has bent its own rules and taken the easy option. Twenty three years [to close the BHS pension deficit] is well beyond what you would expect. The regulator is reactive, not pro-active.”

Some have also looked askance at the individuals to whom Green sold BHS, a motley group called “Retail Acquisitions”. This was led by Mr Chappell, who has been made personally insolvent three times. The chair, Keith Smith, is a former stockbroker who was involved in the public listing of what turned out to be a shell company in 2003 which subsequently collapsed in a fraud scandal. Mr Smith was not in any way implicated in the scandal, nor was he subject to disciplinary action or censure from the London Stock Exchange.

On top of this, the introduction between Sir Philip and Retail Acquisitions was reportedly made by a man called Paul Alexander Sutton, who has been declared bankrupt twice (the first has been discharged and the second was appealed). Retail Acquisitions and Mr Sutton denied that he was involved in the sale.

There is another reason why Sir Philip’s sweeping claim to have cut all ties with BHS was wide of the mark. According to some reports, Sir Philip last week refused to relax the terms of the loan charge he still holds over BHS’s assets, meaning Retail Acquisitions could not access a lending lifeline from the specialist lender Gordon Brothers. It was this failure that Retail acquisitions claim sealed the firm’s fate and prompted the fateful call to the administrators. Sources close to Sir Philip, however, dispute this and say that Retail Acquisitions simply ran out of time and money.

So who has benefited from this shambles? Not Sir Philip who may still find himself on the hook for funding the pension scheme. Not the firm’s many creditors (the group has total debts of £1.3bn). Certainly not the 11,000 BHS employees who now face an uncertain future. But BHS’s boss, Mr Chappell, has paid himself a £540,000 salary for his work over the past year. And Retail Acquisitions has borrowed £8.4m from BHS since the takeover to cover “professional fees” to third parties.

The BHS plane has crashed into the mountains but some of those involved seem to have emerged from the wreckage financially unscathed.

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