Monday 23 May saw the turn of the advisers. This update concentrates on what we will call “adviser group 1” comprising Emma King, the trustees pension lawyer (Eversheds); David Clarke, covenants adviser to the trustees (KPMG); Tony Clare, restructuring pensions adviser to Taveta Investments Limited, the previous owner of BHS (Deloitte); Ian Greenstreet, pension lawyer to Taveta Investments Limited (Nabarro); and Richard Cousins, the independent actuary to the Taveta group (PWC).
The theme of questioning today concentrated on what was known as Project Thor, the project that had been in the pipeline and on the Pension Regulator’s radar but was withdrawn. The committees wanted to delve into the detail of the project, what the advisers thought about it and particularly what they thought or anticipated would happen when a decision was taken to withdraw it.
There appears to have been the three strands of Project Thor. Tony Clare explained to the committees that the directors of Taveta Investments Limited instructed his firm to see if they could agree a restructuring of the BHS pension scheme that would protect the Pensions Protection Fund and deliver the members a better outcome than they would get in a potential insolvency situation.
Mr Clare told the committees that, at the time of their appointment, KPMG was aware that BHS has been loss making for about eight years and was only trading because it had been lent nearly £200 million by Arcadia. He thought that some £50-£60 million of that had gone into the pension scheme. The group was no longer willing to support it and, ultimately, it would go into insolvency if a solution could not be found.
The three strands of Project Thor were:
- Dealing with the pension scheme at the cost of Arcadia
- The bulk of the £200 million loan would be written off
- The other key stakeholders and suppliers, mainly landlords, would agree to take an impairment on their rents.
The committees probed as to why there was apparent confidence that the negotiations between the parties concluded that the project gave the best pensions outcome and yet the Pensions Regulator (TPR) considered there was not enough information. The committees wanted to know why it was never formally put to TPR, although it is clear that a draft clearance application was made leading to discussion with TPR. It was done in draft so that changes could be made if these became necessary to avoid going through the entire process again. This all sounds sensible and practical.
David Clarke explained that discussions took place with the trustees over many months and, faced with the alternative of insolvency, the trustees were supportive of a Project Thor type of proposal but all the numbers had not been bottomed out by the time the draft clearance went to TPR.
Although many months were spent in analysis, planning and negotiation, the project was pulled by Taveta so that the management could focus on trying to turn around BHS and concentrate on the Christmas trading. Deloitte was instructed to notify TPR that the clearance would be paused but TPR would not agree a pause and told Deloitte that the application would have to be withdrawn.
The committees seemed slightly perplexed about the clearance application process and why the trustees did not lead discussions with TPR but then learnt that the process is company driven.
In our last update we surmised that clearance applications might become compulsory, certainly if certain situations arise. We anticipate that, if there is compulsion, there is bound to be even greater trustee involvement. From the questioning it also seems that, if a “deal” can be done that would result in benefits greater than PPF and protects the PPF, mechanisms (if not already provided for by law) should be made available to allow this to happen.
There was some confusion relating to the dates on which the advisers knew about the impending sale but it is clear that it happened fairly quickly after the Christmas trading figures would have been known.
The lawyers, particularly Nabarro, were unable to given any significant assistance to the committees due to legal privilege asserted by their clients. As pension lawyers, they were also unable to give any judgement about the eventual purchaser. It is clear, however, that the trustees informed TPR as soon as they became aware of the sale and TPR appears to have been very active in the relevant period. But readers will recall there was eventual confusion at TPR due to the purchaser changing its name by the time of the sale.
The committees hopped about a bit and went back to the 2014 actuarial valuation position, again wrongly assuming that the lawyers would have a significant role to play. Of course, for most DB schemes, all the valuation work including the negotiations does not involve the lawyers at all. Emma King made this very clear to the committees.
Perhaps this is another strand that the committees might consider needs looking at. Emma King did, however, highlight that TPR was informed about the delayed submission of the valuation documents outside the statutory period.
Another interesting and possibly alarming revelation came from a question posed by Richard Graham of the committees that the Ealing BHS store had been sold to Sir Phillip’s stepson shortly before the sale of the company and then resold shortly after the sale for a significant profit.
David Clarke said that KPMG had asked for details of this and other property transactions. The trustees had asked for independent valuations of the entire property portfolio and eventually received third party valuations in early 2016. Their concern related to whether there was an inevitability of insolvency. Perhaps this might have been one of TPRs concerns when the draft clearance discussions were taking place.
One particularly interesting comment related to a question as to whether trustees ought to have the power to veto a corporate transaction. David Clarke told the committees that, if the BHS scheme trustees had had that power and exercised it, BHS would have entered into administration in 2014 rather than 2016.
Further, David considered that the trustees and their advisers did everything they could within the regulatory framework to ask questions of the sellers and the buyers. Linking this back to the clearance process, maybe this will result in further changes.