The Government has acted quickly to get to the bottom of the demise of BHS. Two select committees for work and pensions and business innovation and skills have been established. Both sought oral evidence from the Pensions Protection Fund (PPF) and The Pensions Regulator (TPR) earlier this week when the chief executives of the PPF (Alan Rubenstein) and TPR (Lesley Titcomb) found themselves under the spotlight.

It is fair to say they were given a pretty good grilling, particularly after the PPF confirmed that BHS came across its radar in 2012, following a breakdown in discussions with Sir Philip Green about the level of PPF guarantee that had been offered by one of the Arcadia group companies. A PPF guarantee is usually given to reduce the risk-based levy that is otherwise payable to the PPF. It transpires that there had been a PPF guarantee in place for the previous year but it was not re-certified and it was then withdrawn.

The PPF risk-based levy then increased. It was at this point that the PPF alerted TPR of its concerns. It also alerted the then Pensions Minister, Steve Webb MP, because Sir Philip Green had indicated that he was unhappy with the policy and wished to discuss it with him. PPF believed that Sir Philip did have that discussion. No doubt the committees will want to hear from Steve Webb in the coming weeks.

In their questioning, the committees were particularly concerned about the length of the recovery plan which, at 23 years, is quite extraordinary. Although pressing the PPF on this, it is of course TPR which agrees the recovery plan but, nevertheless, it has shone a light on the lack of awareness that PPF has about the length of recovery plans that TPR either accepts or investigates.

The committees also questioned Alan Rubenstein at length on the viability of guarantees being used to get around levy payments and why TPR is not involved in this process. Mr Rubenstein made it clear that BHS was not a special case when it came to providing guarantees.

Lesley Titcomb was on the back foot almost immediately when she told the committees that the recovery plan was submitted later than the statutory deadline of 15 months after the valuation date. This means that TPR should have been asked to exercise its discretion to allow late delivery or there was a flagrant disregard of the deadline. TPR opened a recovery plan case on September 2013 which was almost immediately after the valuation documents were finally submitted. This is still open.

The initial questioning has shone a light on the fact that TPR has no direct monitoring involvement in the inter valuation period. It can only get involved to facilitate funding conversations being had by employers and trustees that, as Lesley Titcomb puts it, “are not going too well” or if they fail to agree or if a valuation has been completed using assumptions that TPR does not consider to be prudent. It is the latter that applies here.

With an ongoing recovery plan case still open, TPR then began its anti-avoidance case in March 2015 after the sale to Retail Acquisitions. When questioned about the knowledge relating to dividend payments, Lesley Titcomb was not able to respond because of TPR’s open investigation, something which was of some frustration to the committees.

A further line of questioning related to the length of recovery plans and concern that the period to sign off a valuation is far too long and that TPR had no power to approve the valuations but instead could only use them as a tool to assess if it might need to apply its powers.

Lesley Titcomb told the committees that TPR learnt about the sale to Retail Acquisitions in the press after it happened. This has already come under attack from Sir Philip who has written to the committees saying that TPR had been given advance notice. In addition, both the trustees and Sir Philip have written to tell the committees that discussions about the possible pensions solution commenced in January 2014 and TPR was involved from at least July 2014.

Lesley Titcomb has now written to the committees to clarify the level of engagement received regarding the potential sale. It seems that she had not realised in her initial questioning that Retail Acquisitions was previously known as Swiss Rock and that TPR was well aware of these discussions although maintaining that, in any event, TPR was not given sufficient information to assess the potential impact on the pension scheme and was not approached to give clearance.

The committees’ further probing related to TPR’s relationship with Sir Philip; the new owners; and then onto the use of anti-avoidance powers and the link between using them and the PPF’s position. To put this in context, it is worth highlighting that, as part of its open investigation, TPR is looking at 70,000 documents. This is an enormous task which also prompted resource and skill set questioning, exploration of the enforcement of contribution notices and an explanation of the judicial procedure.

Lesley Titcomb also came in for questioning about TPR’s perceived lack of teeth. While she did not get drawn into extensive discussion, she was willing to acknowledge that she will consider the lessons learnt from BHS in evaluating what changes there should be to the framework set out in the legislation.

It may be too early for speculation but, even at this stage, when assessing the line of questioning, we think that there are some obvious changes that could happen:

  • There needs to be some joined up thinking between PPF and TPR and whilst resisted in the past, we would not be surprised to see that the committees recommend a merger or part merger.
  • It does appear to be inevitable that the outcome will be tighter regulation. The problem with TPR’s current anti-avoidance powers is that they can only be exercised after the event. Although TPR has opened its own investigation and is unlikely to reach a conclusion until the end of this year at the earliest, it is apparent that for TPR to work effectively it needs stronger pre-event powers.
  • Alan Rubenstein suggested to the committees that it ought to be easier for TPR to act proactively and, although Lesley Titcomb would not be drawn at this stage into saying what she would like to see, it is plain that she has been in discussion with the new Pensions Minister, Ros Altman, about this. There could be a number of different approaches but one which we think is a likely possibility is making transaction clearance compulsory.
  • The three year valuation process is likely to stay but we think that there could be a requirement for more inter-valuation information to be supplied.
  • TPR’s ability to use its anti-avoidance powers will be more robust.
  • The use of contingent assets for PPF purposes will become more prescriptive.