Report on the 'demise' of BHS
On 25 July 2016 the Work and Pensions Select Committee and the Business, Innovation and Skills Select Committee published a joint Report on BHS covering the recent history of BHS and its defined benefit (DB) pension scheme leading up to its insolvency. The Report may prove very important for the future regulation of DB schemes, particularly once further enquiries into DB pension regulation are concluded.
The Report generated a great deal of news coverage in the media that will already be familiar about who was deemed to be responsible for the failure of BHS and the predicament of its DB pension scheme. In this article the focus is on the future implications of the report, particularly from a pension perspective.
The Report began by citing a statement from the new Prime Minister as indicating the spirit in which it was drafted.
Theresa May had said that one way “to make our economy work for everyone is by getting tough on irresponsible behaviour in big business […] we’re the party of enterprise, but that does not mean we should be prepared to accept that ‘anything goes”.
The Committees made it clear that BHS was investigated because “it encapsulated many of our ongoing concerns about the regulatory and cultural framework in which business operates, including the ethics of business behaviour, the governance of private companies, the balance between risk and reward, mergers and acquisitions practices, the governance and regulation of workplace pension schemes, and the sustainability of defined benefit pensions”.
The Committees noted that those affected by the failure of BHS include:
- 11,000 employees (many of whom were on low incomes);
- Many other companies that are suppliers to BHS;
- 20,000 current and former BHS employees who face reductions to their DB pensions to PPF levels (in some cases pension reductions are up to 77%); and
- Employers (many of whom are businesses far smaller than BHS) who sponsor one or more of the other 6,000 DB schemes and who fund the payment of PPF levies that will have to meet these extra pension costs.
The Committees found that:
- “The Pensions Regulator (TPR) is reactive and can be slow-moving. … TPR will increasingly be called upon to make decisions crucial for thousands of employees and pensioners in a fast-moving and uncertain environment. It is essential that it has the powers, resources, leadership and commercial acumen to act decisively.”
- “The evidence we have received over the course of this inquiry has at times resembled a circular firing squad. Witnesses appeared to harbour the misconception that they could be absolved from responsibility by blaming others. … The truth is that a large proportion of those who have got rich or richer off the back of BHS are to blame. ... The tragedy is that those who have lost out are the ordinary employees and pensioners. This is the unacceptable face of capitalism.”
- “The sale of BHS did not have to proceed as it did. The potential checks, however, proved to be inadequate. Regulatory concerns were circumvented. Advisers were heavily incentivised to progress the deal. ... [The overall group holding company was] run as a personal fiefdom by a single dominant individual [and] failed to provide a semblance of independent oversight or challenge.”
- The owner gave “insufficient priority was given to the BHS pension scheme over an extended period”. His “failure to resolve its problems … has contributed substantially to the demise of BHS”.
Accordingly the Committees called on Sir Philip Green to “make a large financial contribution”.
Looking ahead the Parliamentary Select Committees made the following statements about further inquiries.
- “The demise of BHS was the result of a series of bad business decisions and personal greed. We fear, however, that some the failures which allowed this to happen are not unique to BHS. Its lessons merit broader consideration of the framework in which companies operate. We will do so from a pro-capitalist perspective. We want entrepreneurs to be encouraged and accept that business failure is an inevitable part of the process. Reputable businesses are, however, appalled by events at BHS.”
- “This inquiry has exposed how capitalism can be worked to the advantage of directors, financiers and advisers at the expense of employees and the wider public interest. This deeply concerning example of corporate governance brings into question the adequacy of existing company law and corporate governance regulation, particularly in relation to large private companies. That private companies are not subject to the same transparency requirements and codes of conduct as their public counterparts in no way absolves them of their wider responsibilities.”
- “Parliament is rightly cautious about imposing onerous new duties on our companies; but if large public or private companies do not behave in accordance with the ethical standards that society expects, further regulation may need to be considered. Ultimately business has a moral responsibility to operate within a framework which enjoys the confidence of the nation.”
- “The future of occupational pension schemes is perhaps the greatest challenge facing longstanding British businesses. In an environment of rising longevity, interest rates close to zero and intense international competition, defined benefit pension liabilities accumulated in a different age can appear burdensome and unaffordable. It should not be forgotten that these liabilities are promises of deferred pay to employees. It is imperative that the regulatory framework does not allow sponsor companies to evade those responsibilities and, in doing so, pass the burden onto other schemes that pay the PPF levy. There may be a case for stronger and more proactive regulation. It is equally important, however, that a balance is found to enable otherwise viable companies to continue to operate. The jobs of those currently in employment are inevitably in some competition with the pension entitlements of their forebears”
Responding to the Report on BHS, the Pensions Regulator welcomed the publication and stated that its “anti-avoidance investigation [into BHS] continues and we expect to make significant progress by the end of the year”.
The Regulator added that it had already written to the Work and Pensions Committee setting out its “preliminary views on which aspects of the regulatory framework could be improved”.
Future development promises to be significant for defined benefit schemes.