Bulletins | May 25, 2016

BHS – the “pensions” tail wagging the dog

Justin McGilloway discusses the extent of the pensions problem in the case of former high street giant BHS.

The well-publicised BHS debacle continues to grip the country. The former high street giant entered administration on 25 April 2016 putting 11,000 jobs across 164 stores at risk. In the weeks since then, speculation has reached fever pitch on the events which led to the cataclysmic downfall of this British retail institution. BHS’s underfunded defined benefit pension schemes have taken centre stage in the media storm surrounding this story. Amongst other things, there have been calls for:

  • Deficits to be made good by former shareholders;
  • Parliamentary committees to conduct all sorts of enquiries; and
  • The Pensions Regulator to flex its muscles in putting things right.

In this article, we look at the extent of the pensions problem.

In the beginning – everything was rosy

Sir Philip Green acquired BHS in 2000 for £200m. In 2002 the company became part of the Arcadia group (which owns brands such as Topshop, Miss Selfridge and Dorothy Perkins). In the years following the acquisition by Sir Philip, BHS performed very well with profit before tax peaking at £102m over the year to 27 March 2004.

However, over the next few years profitability declined – changes in shopping habits, the global economic downturn and competition from discount retailers appear to have contributed to BHS’s woes during the early noughties. The last time the company recorded a profit was in the year to 29 March 2008 and deficits recorded on its balance sheet in respect of its two defined benefit schemes (the BHS Pension Scheme and the BHS Senior Management Scheme (the “BHS Schemes“)) have increased significantly in recent years. In the year to August 2014 the company posted a £21m loss while press reports have suggested that 800,000 shoppers have abandoned the retailer since 2009.

In March 2015 the business was sold for £1 to Retail Acquisitions, a group of City investors led by Dominic Chappell. Work began on a turnaround plan but by early 2016 the future did not look promising. The company was forced to secure company voluntary arrangements (“CVA“) with creditors and suppliers and to negotiate a rent reduction for some of its premises. The CVA also triggered the start of an assessment period for the BHS Schemes to enter the Pension Protection Fund (the “PPF“). This removed the requirement for BHS to support the BHS Schemes and pay any more deficit contributions.

In April 2016, negotiations were under way to secure private equity funding and alternative investment but these talks failed and the formal administration ensued.

The trouble with pensions…

Media reports refer to the headline grabbing “£571m pensions deficit”. This figure represents the most recent estimate of the shortfall between the BHS Schemes’ assets and the price which an insurance company would charge to take on the full level of pension liabilities promised under the BHS Schemes – usually referred to as the “buy-out deficit”. Triggering the buy-out deficit is generally the worst case scenario for a company supporting a pension scheme. The figures quoted are usually significant amounts and in some cases more than the value of the underlying sponsor.

As anyone who works in the pensions industry will know, pension liabilities can change dramatically depending on the valuation basis used, the economic conditions at the time of a valuation and the assumptions used in assessing liabilities. The 31 March 2012 triennial valuations for the BHS Schemes showed a total ongoing scheme specific deficit of £233m. The recovery plans emanating from these valuations were set at 23 years. By today’s standards, a 23 year recovery plan is relatively long. No doubt the trustees of the BHS Schemes would have preferred a shorter recovery plan but one has to assume that the £10m per annum deficit contributions were the most which the company could reasonably afford given its troubles.

We also understand that the trustees reduced the BHS Schemes’ equity allocation from 48% to 10% in 2015 in a bid to reduce risk exposure. Such a move is in line with the Pension Regulator’s guidance regarding integrating the strength of the employer covenant into decisions on investment strategy and funding. However, for the BHS Schemes, the reduction in equity allocation substantially reduced the level of investment risk to the extent that in reality, the trustees of the BHS Schemes were wholly reliant on the financial strength of BHS to achieve full funding. With any hope of BHS’s chances of survival being slim and hopes of investment outperforming eliminated the future looked bleak. The triennial valuation as at 31 March 2015 has not been completed but it’s likely that a recovery plan far in excess of 23 years would have been needed to enable elimination of the ongoing deficit – a tall order given what we now know.

In response to criticism that the 23 year recovery plan submitted by the trustees to the Pensions Regulator in 2012 was too lengthy, the Regulator has stressed that when it notifies a scheme that it is not taking further action, this “does not constitute approval” (i.e. the door is left open for future action).

The Pension Protection Fund’s involvement

As mentioned, the BHS Schemes are already in a PPF assessment period. Typically, PPF assessment takes around 18 months from the insolvency event that triggers the assessment to reaching a decision as to whether the scheme is eligible for PPF entry.

It is estimated that the deficit attributable to the BHS Schemes on the PPF funding basis is somewhere between £250m – £300m, significantly less than the £571m buy-out deficit which is being quoted in the press. The main reason for this is that the PPF provides a level of compensation which is lower than the benefits promised to the 20,000 members through the BHS Schemes. In particular: all members who are under 60 will have a 10% reduction to their pension (with the exception of those who have already retired on the grounds of ill-health or people receiving a spouse’s pension); those with large pensions will see a reduction in their benefits by operation of the PPF’s compensation cap (£37,420.42 for 2016/17); and all members will receive a lower level of increases to their pensions in future years – particularly disappointing for young members expecting many years of increases in the future.

It has also been reported that Retail Acquisitions attempted to negotiate a PPF compromise in advance of the March 2016 CVA. We understand that two proposals were put forward to management, one of which involved providing the PPF with £18m in cash, a £10m loan note, and 33% of the shares in BHS in return. Both offers were rejected.

The Pension Regulator’s involvement

Retail Acquisitions have confirmed that the business had been served with an order from the Pensions Regulator in March 2015. However this was not part of a Pensions Regulator clearance application. Indeed, on the face of it clearance may not have been possible at this time as it is usually only granted if a “Type A” event has occurred – an event which is materially detrimental to the ability of the scheme to meet its pension liabilities.

Whether clearance would have been possible in March 2015 is questionable. The sale of BHS for £1 in was not in itself detrimental to the ability of the BHS Schemes to meet their obligations as substantial value was not extracted from the business at that time.

The Pensions Regulator has stated that it will investigate the collapse of BHS to determine whether it would be appropriate to use its anti-avoidance powers. In a recent statement, it said:

Such cases are complex. There is a clear process that must be followed and this can sometimes take a considerable amount of time. We are unable to provide a running commentary on case investigations, or confirm the targets of our investigation.

When it becomes appropriate to do so we will consider issuing a report of our activities in this case. Reports on our case activities, which are published under Section 89 of the Pensions Act 2004, are available to view on our website.

This stance together with the rejection of Sir Philip Green’s purported offer of £80m to the BHS Schemes (which includes writing off £40m of debt BHS owes to Arcadia) would suggest that the Pension Regulator believes it may be able to extract more through use of its anti-avoidance powers.


It is difficult to be accurate on how much money the Green family or anyone else for that matter extracted from BHS from 2000 to 2015. Media reports suggest £1.2bn but this is merely speculation – many questions need to be answered before we have a true picture of what actually went on. For instance, dividends taken between 2002 and 2004 totaled £423m but this was at a time when the business was apparently doing well and when the BHS Schemes were better funded than they are now. Indeed these dividends pre-date the existence of the Pensions Regulator and its anti-avoidance powers. Conversely it has been suggested that the level of these dividends far exceeded the profits generated and substantially weakened the structure and financial covenant of BHS requiring debt to be taken at a later stage.

There are many stakeholders involved in this affair. It has become heavily politicised and in some respects a “trial by media” for those in the spotlight is well under way. There is no doubt that this case is in its infancy and many months of investigation and a multitude of parliamentary committee hearings (which have already begun) will follow. Whether the Green family or indeed the highly successful Arcadia group has an appetite for the publicity that this case is likely to attract or whether a deal can be done to shore up the estimated PPF deficit of £250 – £300m remains to be seen.

At time of writing a leading pensions lawyer, a professor of accounting and Lord Myners have been drafted in by the government to assist a parliamentary probe into the collapse of BHS. This has not only served to heighten the sense of drama associated with the investigation but demonstrated the complexity of the issues involved. However, one must not lose sight of the uncertainty faced by the real victims of the pension mess – the members of the BHS Schemes, many of whom are likely to face the very real risks of (i) reduced pension benefits; and (ii) unemployment.

Further Information

For further information on the topics raised in this article, please contact a member of the Pensions & Employee Benefits Team.