Don't bank on the regulator against Philip Green

Something has been getting me ever since BhS hit the buffers and the media firestorm directed at Philip Green took hold. (I've already ditched his knighthood by the way, as I don't agree with them. A bit like the Liverpool fans and "Sir" Roger Hunt, but in reverse).

For a long time I kept saying "if there's a case against Green, why doesn't the Pension Regulator act?" Well they have now, commencing enforcement action. A City source said that, given the legislation under which the notices had been issued has never been tested, the entire case could end up being dragged through the courts for a number of years. While I understand why the BhS former employees and scheme pensioners are upset and want to see Green pay, I suspect the action is being taken only because of the political background rather than the strength of the case. A bit like the CPS with celebrities accused of historic sex cases, they daren't be seen not to take it at least as far as makes sense (and probably a bit further than makes sense, just for them to be safe).

OK, Phil Green knew BhS was getting weaker. He'd been trying to sell it for some time. Yes, he'd taken out large dividends, but many years earlier, not recently. Yes, the pension scheme had slumped into a larger deficit subsequently, but so have the schemes of just about every other company with a traditional scheme. Sarah Vine (aka Mrs Gove) suggested in her Daily Mail column that someone should be looking at those companies, making a veiled suggestion that they had all been the victims of raids by greedy bosses and shareholders. I'd look more at the Bank of England's quantitative easing, with the concomitant low interest rates and returns on gilts and bonds, which pension schemes have to hold a reasonable chunk of as they are deemed safer than equities by, yes, the pensions regulator. Safe but awful returns at the moment, locking in those big deficits.

The facts are: Green and family took out £307M in dividends between 2002 and 2006. At that time the pension fund was in surplus (well, a small deficit in 2006). A lot of big companies already had large pension deficits back then (the one I worked for certainly did). It steadily went into deficit thereafter - as did many others. This timing correlates precisely with the financial crisis, so is not particularly suspicious. Pension funds that are in deficit have to agree a recovery plan with the trustees. A report I've read (Business Insider, reference below) says that Green agreed a 23 year recovery plan, which the regulator didn't like and started investigating. 23 years is at the longer end of acceptable recovery plan timescales - the company I once worked for agreed a somewhat longer recovery plan, about 28 I think, said at the time to be the longest the regulator would contemplate. And that company (which I had left several years earlier, fortunately) went bust in 2012, with its pension fund falling into the Pension Protection Fund (PPF). Not unlike BhS you might think.

The papers always lead with the figure of around £570M which is quoted as the BhS pension deficit. (It's now grown to over £700M due to currency movements, but you can't blame Green for that!) When PG sold BhS the deficit was more like £300M. It more than doubles at the instant a company goes out of business, as overnight the stream of employer and employee pension contributions dries up. BhS went bust around a year after Green bailed out.

My other half and I were surprised for several years that BhS had managed to keep going. I can recall contrasting the footfall at BhS in Reading with the nearby M&S - given the location I can place that before 2007. In later years we would go in to buy towels (quality wasn't a BhS problem) and its lighting department was good. There would be very few shoppers there, though most of them were actually buying. But one wondered, if the shops are so deserted, how can the company possibly survive?  We all knew it was on a slippery slope.

Now there are suggestions that Green knew BhS was actually "bust" when he sold it (e.g. see the Thisismoney.co.uk article referenced below) to Retail Acquisitions, a vehicle set up by twice former bankrupt huckster Dominic Chappell and co-conspirators. Well, technically, I expect it had liabilities greater than its assets because of the pension scheme, as plenty of companies do (I thought Tata Steel was one, but I see it's deficit shrank from £700M to £50M because of currency gains -  every cloud eh?) but that doesn't prevent them being considered a going concern as long as the company can afford the ongoing employer's pension contributions. If it genuinely wasn't a going concern I'm not sure how Chappell kept it going a year. And if it really wasn't a going concern, Green would clearly have broken company law - and no-one has suggested that.

There are also suggestions that Green concealed the pensions issue from Retail Acquisitions, e.g. see the Business Insider article. Eh? Everyone knew these companies had a pension problem - after all Tesco's deficit has just doubled to £5 billion. And it's suggested that the BhS pension trustees told Chappell cash injections would be needed. Also if the Pension Regulator was "investigating" BhS then I thought they had significant powers to intervene if there is a proposal to sell the company, including requiring cash injections into the scheme. I have worked in companies where the regulator has made such stipulations, but there may have been special circumstances around privatisation and onward sale of former public sector organisations. If the regulator doesn't have that power then this is a change crying out to be made. Indeed it has recently been advocated by Lady Barbara Judge, Chairman of the Institute of Directors and a past Chairman of the PPF (see Telegraph article).

But there is another smoking gun which I haven't heard anyone refer to. The purchasers of BhS, Retail Acquisitions, always looked flaky. Green, having been trying and failing to offload BhS for some time, must have thought they'd  emerged from heaven. Green used a heavyweight team of legal and financial advisers on the disposal and he doesn't have any more than a moral obligation to find a "good buyer". And plenty of billionaires were bankrupts early in their career. I can't help wondering though - what if Green and co found some hucksters to encourage to buy the company? "It'll go bust anyway, but in the meantime you can pay yourself a lot of money in salaries" (as they certainly did). I've probably been reading too many conspiracy theories lately and, if there was anything whatsoever to suggest this you'd have thought the media would be all over it. In the absence of proof of such a link, I can't see that Green has committed any crime and any responsibility he has is at the most "moral".

In which case, Green's reported offer of £300M to "fix" the BhS pension problem is verging on being generous. It's the approximate size of the deficit when he sold the company. Even if he hadn't sold the company and it had gone bust, by definition he could never have had control of the company with a £571M deficit, as by that point the company was bust and couldn't have been his.

Green may be unsavoury but he ain't in Robert Maxwell's league. (Maxwell, remember, was actually taking money out of the Mirror Group pension scheme and in an era when there was no PPF lifeboat).

Which is why I think the regulator is acting either under political influence or because of political appearances. The shame of it all is that Green's dosh probably won't improve the lot of ordinary former BhS employees. It will go into the PPF's coffers. The only succour to be taken is that Green would have paid up and undefined other schemes in the future would be more likely to be able to benefit from bailout by the under strain PPF. Sufficiently under strain that I expect the viability of the PPF to become an issue one day.

Oh, and if Sarah Vine wants to look into large organisations with big pension deficits, she'll have to include the National Trust, Cancer Research, RNLI and Guide Dogs all of which have multi-million pound deficits. As a result, a larger proportion of our donations will be going into administration charges in the future. People used to tell me that pension deficits were a private sector problem caused by poor management and greedy shareholders. Well, the above organisations are in the private sector, but you can't blame shareholders there! Of course, it's now well acknowledged that public sector pensions are effectively just as much in "deficit", in terms of the burden of future payments, but the organisations concerned can't go bust in the same way.

Incidentally, I've seen it suggested that "obviously" companies with pension deficits shouldn't be allowed to pay dividends. But as the deficit or surplus (a smallish difference between two large numbers) depends on a large number of assumptions and can swing around violently (e.g. Tata Steel, £650M swing in a few months because of the movement in the £) I can't see that is a tenable suggestion. And who would be most hit? Aren't pension funds the largest holders of shares? D'oh! When will people allow for unintended consequences?

I could envisage that maybe there should be a clawback in the case of dividends paid out to individuals if there are big problems with a pension scheme in short order. I doubt anyone framing such regulations would go back more than 10 years, which is what it would have to for Green to have been caught by it.

We can only wonder whether Green thinks he is liable, or if he is trying to protect whatever of his reputation remains. (Well that ain't worked, Phil). Maybe he has pitched his offer at a point where it will be very difficult for the regulator to prove a case for a higher figure; in other words it's an attempt to settle. But he's got deep pockets for legal fees as well as for coughing up and, whatever people think about Green, I think the pension regulator has a tall task to prove the case for Green paying more than the deficit that existed when he last had control of the company.


References:

Regulator begins enforcement action: http://www.telegraph.co.uk/business/2016/11/02/sir-philip-green-in-firing-line-as-pensions-regulator-begins-enf/

BHS pension stats from http://uk.businessinsider.com/sir-philip-green-bhs-pension-fund-2016-7

ThisIsMoney article: http://www.thisismoney.co.uk/money/news/article-3601542/Sir-Philip-Green-knew-BHS-bust-sold-1-twice-bankrupt-former-racing-driver-MPs-told.html

"British Steel pension shortfall shrinks..." at http://uk.reuters.com/article/uk-tata-steel-pension-idUKKCN12O2FX

Tesco deficit: http://www.telegraph.co.uk/business/2016/09/24/tesco-setback-as-pension-black-hole-balloons-to-5bn/

Lady Barbara Judge article: http://www.telegraph.co.uk/business/2016/07/30/empowering-the-pensions-regulator-could-stop-takeovers-ruining-f/