Sir Philip Green and the BHS scandal

MoneyWeek cover illustration issue 804

Sir Philip Green, the former owner of BHS, has been branded the “unacceptable face of capitalism” by MPs investigating the retailer’s collapse. Is that fair? Simon Wilson reports.

What’s happened?

The verdict of two House of Commons select committees into the sale of BHS in May 2015 by its former owner Sir Philip Green, and its subsequent collapse, was published this week – and it could hardly have been more damning. Green is not accused of any criminal wrongdoing; indeed, he has threatened to sue one of the committee chairmen, Frank Field, for claiming in a radio interview that Green had stolen from the BHS pension scheme and was worse than Robert Maxwell.

However, the billionaire retailer is accused of appalling judgement and excessive greed in allowing a vast pension deficit to build up on his watch, taking hundreds of millions out of the business in dividends, and then selling BHS for £1 (while writing off a £215m debt owed to the Arcadia group by BHS) to an inept chancer with a history of bankruptcy and no retail experience.

What’s the background?

British Home Stores, founded in 1928, was by its later years a famously struggling mid-market retailer that had failed to adjust to the age of the internet. In 2000, BHS was bought by Green for £200m, and eventually merged into his Arcadia group (which includes brands such as Topshop and Miss Selfridge).

At first the business was profitable, thanks to massive cost-cutting, and it wasn’t long before Green was up on the deal. Between 2002 and 2004 the company paid out dividends of £423m (despite being loaded up with debt), the bulk of which went to Sir Philip and his wife, Tina. It also paid rent totalling £155m between 2002 and 2014 to a property company owned by the Greens.

Sounds nice – why did he sell?

Because after a few good early years, Green had presided over a streak of losses and falling sales and BHS had become a byword for high-street decay. As the MPs put it, “we found little evidence to support the reputation for retail business acumen for which he received his knighthood”; rather, they found a pattern of underinvestment and neglect. By 2015 Green was anxious to offload a chain that “had become a financial millstone and threatened his reputation” – and he pushed through a sale to a newly formed consortium led by Dominic Chappell, a three-time former bankrupt.

Chappell is described by the report as “out of his depth”, “overoptimistic to the point of arrogance”, and effectively having his “hands in the till” – such were the lavish rewards (about £2.6m) he extracted from his brief period of ownership at no personal risk. And the professional advisers of all concerned are also given a good kicking for waving through such a flawed sale, which ended in BHS’s collapse a year later.

What about the pension scheme?

Green didn’t “plunder” the BHS pension scheme, and Field’s over-colourful claims have lent credence to Green’s defence that the MPs’ report was the “predetermined and inaccurate output of a biased and unfair process”. But the case against him is not just that he ran down the capital in BHS to a level that was fatally unsustainable when trading conditions deteriorated.

It is also that he then sold the business for nothing to an unsuitable buyer without making reasonable provision for the solvency of its pension fund, which he is accused of neglecting over a period of many years and which is now in deficit to the tune of £571m. Of course, the years in question were tough for all defined-benefits schemes. From a surplus in 2008, the financial crisis led to a steep decline in the value of assets while at the same time long-term interest rates plunged, increasing liabilities (ie, the cost of paying future pensions).

So Green was unlucky?

It’s hard to consider a billionaire who’s just taken delivery of his third superyacht unlucky. But the facts are that when Green was (quite legally) taking his vast dividends from BHS there wasn’t a pension deficit and no one was predicting that within a few years interest rates would collapse to historic lows. The BHS collapse raises questions of corporate governance and questions for policymakers over the tax rules that privilege debt over equity.

The vilification of Green in relation to the pension scheme raises questions for executives and shareholders of other firms over whether they might be retrospectively penalised for ballooning deficits that are beyond their control. That said, after Green transferred ownership of BHS to his family firms, he failed to address the deficits at its pension schemes, despite warnings from the trustees.

What might he be liable for?

Green, who has clearly recognised some responsibility for the debacle in promising to “sort” the issue and making an informal offer of £80m, remains the subject of an investigation by the pensions regulator, and is under intense political pressure to up his offer (or risk losing his knighthood).

No doubt he is hoping that as interest rates rise again, the deficit will close. But as things stand, in order to provide BHS pensioners with a better outcome than if the scheme remains in the Pensions Protection Fund, Sir Philip would need to write a cheque for £275m, according to The Times. If all BHS members are to receive their full entitlements, that would soar to over £500m.

Does the regulator have a case?

The pensions regulator is on shaky ground, says Claire Southern of law firm Hogan Lovells. “If the regulator could persuade Sir Philip Green to pay more than £500m into the scheme it would be over the moon, but I can’t see him handing over anything like that sum. If the regulator went after him, using anti-avoidance powers, I think it unlikely they would get anywhere near that level. They would struggle to make a really strong case. They could look at numerous small things he did but I doubt they would be able to claim for the full buy-out debt. Philip Green may well decide that his best line of defence is to say: ‘Fine, litigate it and let the courts decide’.”

  • Aztec

    The problem with predefined benefit schemes is that companies simply cannot provide sufficient cash to fund them without hitting shareholder dividends and investment for the future. What is wrong here is the actual pension legislation. Government needs to be honest with pensioners, and state that in a low interest environment, and tax on the pension pot, that these schemes cannot be funded without putting companies into serious trouble.
    Those trying to maintain them actually want their good loyal hard working people to leave the company. Those that stay will be rewarded by bonus payments that fall outside the pension payments, their salaries will fall behind inflation.
    The five percent tax on the pension pot in a low interest environment means that after twenty or so years Government has taken all your money assuming you stopped paying in and the fund did not grow.

  • DemiGod

    Merryn looked at this a while back; the asset allocation of the BHS pension fund has largely been in bonds, certainly that way in 2015 at 90%. Returns on bonds over the longer period from 2008 to current have significantly underperformed equites which made up just 10% allocation in 2015. While the returns for that year have been acceptable, Green has little to do with pension underperformance, it is a global issue. An issue that is coming to a head too with bonds falling into negative rates in many countries. Green is in many ways being scapegoated. The real problem is government. We have no confidence in them or believe any measure they put in place is going to work. Will this come to a head soon and governments not be able to issue debt? Will bond rates rise exponentially at market dictate over BOE? Probably and when it happens those pension funds going to bonds as a safe haven will be hung out to dry!

  • Roger Balcombe

    The “unacceptable face of capitalism” was perfectly acceptable when everyone was doing nicely from it, wasn’t it. Now there’s a real risk of personal disadvantage when it’s not going so well and it’s suddenly not fair – as a solution these ‘criminals’ should use their moral compasses and pay back the money, which will make up for deficits in planning and regulation.

    It’s clear that we need a proper solution for pensions, but equally – and arguably more urgently – higher interest rates. Making the BOE independent of the government and stop propping up house prices would be a good start.

  • 4-caster

    Companies have a moral duty to fund their staff pension schemes adequately, allowing for all eventualities, before they pay a penny in dividends. Whether that is a legal duty should be for courts to decide.
    But we have been here before, for example with Robert Maxwell plundering the Mirror newspaper pension scheme. If it is not a criminal offence for an owner to plunder and asset-strip a company whilst leaving it unable to pay pensions to its staff, then it should be.