Wednesday, 25 May was the turn of the current and former trustees. The composition of the current trustees is two member-nominated directors of BHS pension trustees, namely Jason Hyde and Phil Kitchen, plus two professional trustees, MGL Corporate Services Limited (represented by Mike Lymath) and Independent Trustee Services (represented by Chris Martin, also the chair of the trustees).

The former trustees were represented by Dr Margaret Downes (the former chair); Siobhan Fohey, employer-nominated and Group HR director and Traveta board member; and Richard De Dombal, employer-nominated and a member of the Arcadia finance team.

Initial questioning was around the composition of the current trustees and how they came to be trustees. It then turned to their knowledge of the state of BHS and how they received this knowledge. Chris Martin was the main spokesperson at this stage of the session confirming his terms of appointment. He also raised a few eyebrows when he said that, in the last two years and five months, his trustee company had received circa a quarter of a million pounds in fees which had been met out of the scheme funds.

Questioned about his main priorities as trustee chair, Chris Martin explained that protecting the interest of the members was central and investment strategy was one of their primary objectives, aligned with sponsor covenant strength and the funding level of the scheme. Project Thor was introduced after only 28 days following his appointment. His initial view of the investment strategy was that the level of risk being taken was a little higher than he would have expected to see given the implied strength of covenant and a thorough investment review was triggered immediately following the Thor proposal.

Asked about contact with Paul Budge and Sir Philip Green, Chris Martin explained that initial contact was with Mr Budge in a meeting where he was also introduced to Arcadia advisors who had put together Project Thor. Thor was developed over the next five to six months and most trustee contact at that stage was with their own advisors. There was only limited contact with Arcadia and his contact with Sir Philip Green only really started when they were discussing the potential sale (some months later). Contact with the Pensions Regulator (TPR) concerning Project Thor started in July 2014.

The committees were interested to know whether Chris Martin had ever met Paul Budge or Sir Philip before he was appointed. His appointment was made and approved by the former trustees and he only met them at a courtesy meeting which lasted less than 15 minutes. The Rules of the Scheme vest the power of appointment and removal in the trustees rather than with the employer. This is a relatively unusual structure.

Chris Martin was questioned on his view of the then 23 year recovery plan. He told the committees that the time frame between his appointment and Thor being on the table was not long enough to formulate a plan to shorten the recovery. He was, however given a copy of the covenant review that had been carried out by his predecessors.

The committees seem to like hypothetical questions and asked what he would have done if Thor had not come along. He confirmed that he would have continued engagement with the TPR as they were already looking at the position behind the 2012 valuation (please see our summary of the session with TPR). If Thor had not come about, the trustees would have had to think about steps to get a stronger long-term commitment and/or to take risk out of the investment strategy to delivery better outcomes for members.

It took about four months for the trustees and the advisors to go through all details of Thor to a point where they were confident that Thor would deliver a better outcome to members than the inevitable insolvency, which was the alternative. It was at this point that they then engaged with TPR. During that engagement, they set out their understanding of Thor and the work they had carried out to test it.

A draft clearance application was then put in by Arcadia. There was a two month high intensity period where there were many calls between TPR, the trustees and their advisors and a significant amount of information provided by the trustees. It appears that part of the Thor proposition involved a regulated apportionment arrangement (RAA). RAAs are extremely rare and require a significant amount of due diligence to take place by TPR and involvement from the PPF if they are to be granted.

We already know from TPR’s session that they had not got themselves comfortable and felt there were still questions that needed to be answered by Arcadia. In their own statement about the use of RAAs, they say “TPR and PPF will not agree them lightly”.

When Thor was eventually pulled, the trustees were disappointed as they felt that it represented a better outcome for the scheme members than PPF. They were told on 5 September that it would be paused as Arcadia wanted to carry out a full strategic review, with all options available after Christmas trading. It was presented to the trustees as “This is a pause. We want to consider our options and will come back to you in the New Year”. This is a slightly different picture to the one painted by Paul Budge at this session on 23 May.

In the knowledge that Arcadia would not support BHS further, the trustees started to behave as if there was no covenant at all as BHS would never be able to support the scheme on its own. They engaged a significant de-risking of the investment strategy.

The sale to Retail Acquisitions was first mentioned to Chris Martin on 2 February 2015 when the trustees were asked to sign non-disclosure agreements. After these were signed, Chris Martin met with Paul Budge and Deloitte (which advised Arcadia) on 9 February when he was informed that the short list of potential acquirers had now been whittled down to Retail Acquisitions.

He then met three of the Retail Acquisitions team on 19 February. After this, the trustees engaged KPMG to establish the impact this acquisition would have on the employer covenant. Questioned about the due diligence carried out by the trustees on the acquirer, Chris Martin explained that this concerned the financial impact acquisition and not the calibre of the acquirer.

The trustees did, however, share their views with TPR. Asked if the acquirer passed Chris Martin’s ‘sniff test’ he simply confirmed that he was given a high level overview of their experience. They talked about working capital and the turnaround plan they had in mind and their trust in the existing management structure. They gave assurances about putting in place a Project Thor type of arrangement and that there would be ongoing discussions with the trustees. This was then put in writing following that meeting at the request of the trustees. No other trustee met with them.

Post-acquisition, all contributions were paid in line with the recovery plan and, after a few months, Project Vera emerged. Those details were first known in July 2015 and then several months were spent developing this into something that looked very similar to Project Thor.

Former trustees

It was then the turn of the former trustees. Their initial questioning concerned their conflicts of interest and how employer-nominated trustees handled these and whether such conflicts should be eliminated from trustee boards. There was also focus on the regularity of trustee and sub-committee meetings and the way in which they approached their advisor appointments.

As a main board director, Siobhan Forey came under most of the spotlight with the committees wanting to know how she reconciled looking after the scheme members while looking after the shareholder interest and was asked who she was lobbying for when trying to juggle the totally conflicting responsibilities. She explained how she handled those and told the committees that she had no involvement in Project Thor given her conflict. Richard, on the other hand, did but had no involvement in the project for Arcadia.

Questioned about the significant rise in the length of the recovery plan at the 2012 valuation, Dr Margaret Downes explained that the assumptions used were more prudent because the covenant of BHS had deteriorated substantially. She confirmed that the trustees knew from the outset that the maximum that Arcadia could give to the scheme was £10 million per annum. The trustees could not get them to move on that figure.

She said she met Mr Budge at least six times during that 2012 valuation cycle and Sir Philip Green once, along with his son and Paul Budge, to review the trustees’ investment strategy. Sir Philip confirmed that they were not prepared to give more than £10 million but he did commit to give that amount in the future.

The committees then took interest in Sir Philip's involvement with the scheme and asked if he called the shots. Margaret Downes said she had met him four or five times in the 13 years she had been a trustee. Of course in that period, BHS had been sold and repurchased so, although it is a relatively low number, it is not that surprising. Those meetings were on his initiation and always about the scheme investment strategy. Although he had proposals to make, rarely did any result in any amendment to the trustee strategy. She made the point that it is perfectly normal for sponsors to question the strategy because of the impact on the business and balance sheet.

The committees did seem slightly confused about how they ended up with a 23 year recovery plan. Margaret Downes explained that it was purely a mathematical division of the £230 million deficit that existed at that time divided by 23 to bring about a figure of £10 million per annum. The committees then raised Chris Martin’s earlier statement where he said that there was more risk of investment strategy than he would have liked when he took over the chairmanship. Margaret Downes agreed with this but explained that de-risking had been happening on an ongoing basis but they did keep in some risk to help recovery. The committees jumped on this as perhaps getting the scheme into moral hazard territory by building in too much risk into a scheme with such a long recovery plan.

By the time the questioning finished, it appeared, however, that Margaret Downes and the other former trustees had explained enough to allow the committees to understand that, in the period where they knew that BHS was a distressed company, there was no increased risk in the investment strategy taken.

The type of questioning in the sessions lead us to think that the committees have concerns about the lack of involvement that trustees actually have when a corporate decides to sell up. TPR’s moral hazard powers were initially enough to make corporates take a precautionary route and seek clearance but, as time has passed, clearance is not often used as advisers have gained greater confidence as to when and how TPR might use its powers, if at all, post completion.

We think that the legislation will be changed to make clearance mandatory in certain situations. This is bound to create great debate as, if it is not compulsory for all transactions, there will always be room for argument and doubt. Corporate life will not relish such restrictions but it is difficult to see the legislation remaining as it is. It is possible that trustees may also be given specific powers relating to clearance or perhaps given alternative powers.

It is very tricky because, for sound economic reasons, it would not be a good idea to stifle corporate activity but, at the same time, there does need to be some caution where a DB scheme is involved. It is also clear that there is concern about conflicts of interest on trustee boards. There may therefore be some shake up which might be to ensure that all DB schemes are required to have an independent professional pensions trustee and some restrictions on sponsor-appointed trustees.

Our readers should note that this is a very short and selective analysis of the sessions.