BHS and Arcadia Schemes: Greater scrutiny of corporate activity on the horizon

As the pensions industry digests the re-introduced Pension Schemes Bill and eagerly awaits The Pensions Regulator’s (TPR) new funding code, TPR has published details of two cases which aptly demonstrate the direction of travel of its intervention and enforcement work – both of which indirectly involve the retail tycoon Sir Philip Green.

The BHS Determination Notice

The first TPR publication was a Determination Notice, released following TPR’s lengthy court battle with Dominic Chappell, whose company purchased BHS from Green’s family. The Determination Notice sets out TPR’s decision to order Chappell to pay a sum of £9.5m towards BHS’s two defined benefit (DB) pension schemes (£9.4m to the main scheme and £95,430 to the executive scheme). The Notice was published after the Upper Tribunal rejected Chappell’s attempt to refer the Notice to it, meaning that the Notice remains in effect.

The TPR’s Determination Panel stated that Chappell’s payments will be distributed for the benefit of scheme members as redress for “a series of acts or failures to act” that were “materially detrimental” to the schemes, including the sale of BHS to Chappell’s company itself; the continuation of the business at a time when it was loss-making and insolvent; subsequent management decisions resulting in further deterioration of the business; the appointment of under-qualified board members; the implementation of an ineffective and inadequate business plan; and the way in which money was extracted from the business and distributed to Chappell and his associates and advisors.

TPR’s Executive Director, Nicola Parish, stated that the Chappell case "illustrates how TPR is willing to pursue a case through the courts to seek redress for pensions savers… it illustrates the situations our anti-avoidance powers were designed to meet and which allow us to protect the retirement incomes that savers deserve".

On a happier note, for the members who transferred to the ‘BHS2’ pension scheme set up following the retailer’s collapse, the £363m payment made towards the schemes’ pension liabilities by Sir Philip allowed a full buyout of the BHS2 members’ benefits to be achieved within 12 months. The main scheme and executive scheme are currently in the Pension Protection Fund (PPF) assessment period.

The Determination Notice can be viewed here.

The Arcadia Regulatory Intervention Report

Hot on the heels of the Determination Notice was the Regulatory Intervention Report in relation to another Green family company, Arcadia Group Limited (AGL), and its own DB schemes. The Report highlights TPR’s expectations of employers which are looking to implement company voluntary arrangements (CVAs), most notably:

  • Employers and their advisers should engage early with TPR and the PPF – particularly as the PPF will have voting rights in the CVA as a creditor, if the scheme is eligible for PPF entry; and
  • Trustees and their advisers should be actively engaged and willing to work collaboratively with TPR and the PPF.

In the AGL case, the trustees, the employer and their respective advisers engaged with TPR and the PPF in a timely and constructive manner. The aggregate ‘section 75’ debt of the BHS schemes gave them a claim of around 35% of the value of AGL’s creditors, which meant that they had a potential ‘blocking’ vote in the proposed AGL CVA. The CVA proposed halving the employer’s annual deficit reduction contributions (DRCs) from £50m to £25m: although that reduction was ultimately agreed to by the trustees, with the support of TPR and the PPF the scheme obtained notable mitigation from the employer, including £185m in security over group assets; £100m in cash from the majority shareholder, along with a further £25m security; and an agreement to increase the £25m DRCs after three years.

The Report also explained that, in assessing the CVA proposal, TPR applied the various principles which it considers when deciding whether to approve the implementation of a proposed Regulated Apportionment Arrangement, including whether the employer’s insolvency would otherwise be inevitable, and whether the schemes might receive more from an insolvency.

The Report is available here.

Comment

These cases are not the first of their kind as TPR continues to increase scrutiny of corporate activity in cases in which occupational pension schemes are involved. To that end, the new Pension Schemes Bill proposes to introduce a broader range of criminal and civil measures to assist TPR with its enforcement work, including setting out:

  • Additional circumstances in which TPR can issue a Contribution Notice (CN), and new sanctions for failure to comply with a CN;
  • New criminal offences for employers who are deemed to be avoiding their debts to their DB schemes, or putting accrued scheme benefits at risk through their conduct;
  • Additional circumstances in which notifiable event reports must be submitted in respect of a scheme’s sponsoring employer, and higher penalties for the failure to do so; and
  • the granting of greater powers to TPR to gather information and sanction those who provide it with false or misleading information.

Whilst concerns have been expressed in the industry about the breadth of the proposed criminal sanctions, they do not appear to have impacted on the draft prior to its reintroduction in Parliament. Employers and trustees should carefully consider the implications of any proposed corporate activity and take appropriate advice.

We will be keeping a close eye on the Bill’s progress and the forthcoming two-part consultation on a revised DB funding code, expected to launch in March. The updated regime will provide employers and their schemes with the choice of opting for a ‘fast track’ or a ‘bespoke’ approach to engaging with TPR. More on that in a future Insight from the Pensions Group.

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