Revisiting the BHS Pensions Scandal: Lessons for Pension Trustees
British Home Stores (BHS) was founded in 1928 by a group of entrepreneurs seeking to imitate the successful business model set by Woolworths. The company was successful in its early years and went public in 1933.
As has been well publicised, BHS did not enjoy the same success following the purchase of the company by Philip Green in 2000, for £200 million. A series of scandals ensued, and BHS’s tangible fixed assets diminished in value from £430 million in 2000 to £183 million in 2014. This is despite BHS paying out £414 million in dividends between 2002 and 2004, almost double the after-tax profits of £208 million. Green’s tenure ended with the sale of BHS for £1 to Retail Acquisition Limited (RAL), owned by Dominic Chappell, in March 2015, and in April 2016, BHS went into administration.
Ex-BHS directors Dominic Chappell and Lennart Henningson were recently ordered to pay at least £18m to creditors for their role in the collapse, and this development has brought renewed media attention to the case.
Whilst the court’s decision in the liquidator’s case against the ex-directors is a fascinating development, it should not be forgotten that one of the most damning indictments of the whole scandal was the management of BHS’s defined benefits pension fund, which declined from a surplus position of £43 million in 2000 to a deficit of £345 million in 2015, and eventually a deficit was £571m at the time of the administration. This left 20,000 current and former employees facing reductions to their pensions of up to 77%, and the scheme being handled under the Pension Protection Fund. Following an investigation by The Pensions Regulator, Green reached a £363m settlement with them, plugging a significant hole in the fund. Chappell was also ordered to pay £9.5m into the scheme following contribution notices issued by the regulator.
In July 2016, the UK Government released a Parliamentary Report commenting on the actions and conduct of those who owned and operated BHS, and the trustees responsible for protecting the pension fund. It found that Green ‘accrued incredible wealth during the early, profitable years of BHS ownership’, but that over the course of Green’s tenure ‘significantly more money left the company than was invested in it’, and that any investment was ‘either inadequate in scale or ineffective in improving the competitive edge of the business’. The report concluded that Chappell was aware that the pension schemes were in heavy deficit before purchasing BHS, and that he ‘accepted responsibility for it with a negligent and cavalier disregard for the risks and potential consequences’.
With the renewed interest in this case, we have taken the opportunity to revisit some of the learnings that arise from the pension debacle for trustees of pension funds.
1. Rigorous Due Diligence during a Sale or Restructuring
When there is a transaction involving the pension scheme sponsor, there should be an analysis conducted as to the impact of the sale or restructuring on the scheme, such that protective measures can be negotiated and put in place, if necessary. In this case, even before the sale of BHS for £1, the deficit was increasing, and trustees were attempting to engage with the sponsoring company to address this. No solution was found prior to the sale, and when it came to the sale, the trustees were simply not provided with any information, despite requests, making it impossible for them to conduct any due diligence on the sale, and to put in place protective measures.
2. Collaborative approach between the Trustees, the Sponsor and the Pensions Regulator
The BHS pension scheme was managed independently by a board of trustees acting in the interests of beneficiaries, collecting contributions from both the members and the sponsoring employer, investing assets and paying benefits. However, the Parliamentary Report found that Green and his directors repeatedly resisted requests from trustees for increased contributions to BHS’s pension schemes. What is clear is that the board of trustees lacked sufficient powers to compel the scheme sponsor to deal with their requests, whilst the fund was moving sharply from a surplus to a deficit.
Following the scandal several legislative changes and regulatory enhancements were introduced aimed to address the issues that arose, particularly the lack of ability to compel the sponsor to deal with trustees’ requests. In response to this, the Pensions Scheme Act 2021 introduced broader rights of trustees to request information from sponsors; more stringent requirements on sponsors to comply with such requests; and made it a criminal offence for sponsor to deliberately provide false or misleading information to trustees. Further, the Act introduced stricter reporting and disclosure requirements to The Pensions Regulator, such that the regulator can monitor the health of the scheme and intervene if necessary. Had this enhanced legislation been in place earlier, the trustees might have had a better chance of preventing the issues that arose. To avoid similar situations in the future, pension trustees would be well advised to proactively leverage these expanded powers, in order to facilitate a more collaborative approach with the sponsoring employer.
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