BHS demise shows the failure of predatory capitalism

Thousands are facing unemployment and depleted pension payments — company law must change


After 88 years of trading, BHS is to be liquidated. Around 11,000 staff at its 163 stores will lose their jobs.

Attention will now focus on the pension scheme deficits which will drastically reduce the pensions of over 20,000 present and past employees. No doubt, the ongoing parliamentary hearings will closely look at this.

Firstly, some background. Even before BHS was acquired by Sir Philip Green, the company operated a Defined Benefit (DB) pension scheme. Under this, the employee and the employer make agreed contributions and an amount of pension (or a formula for that) is guaranteed.

At the end of each financial year, the company has to determine whether the accumulated assets are sufficient to meet the promised pension obligations. The financial calculations are dependent upon the state of the FTSE Index, life expectancy of staff, salaries, inflation rates, interest rates, yields on corporate bonds and other factors.

If the pension obligations exceed the value of the assets then that gives rise to a deficit. Most pension contracts require employers to make additional contributions to address the deficits.

It works the other way too. During the 1980s and 1990s, many DB schemes were in surplus. The government permitted employers to take pension holidays i.e. they did not make any contribution.

Collectively, employers avoided almost £18 billion of contributions during 1990s alone though employees made full contributions.

Pension scheme surpluses were used to pay higher dividends to shareholders. For example, Unilever took £1.2bn from its pension fund and used it to finance dividends and share buybacks, but in 2002 asked employees to make higher contribution. Even in 2007 and 2008, Shell and BP were taking pension holidays.

The BHS story begins in the year 2000 when Sir Philip Green acquired it for £200 million. At that time the BHS pension scheme was not in deficit, but the position soon changed as the extracts from its accounts show.

Year BHS Pension Scheme

Surplus(Deficit) £M

2003 (76.6)

2004 (80.8)

2005 (74.7)

2006 (69.7)

2007 (32.2)

2008      3.4

2009 (137.9)

2010 (161.8)

2011 (105.4)

2012 (94.9)

2013 (136.6)

2014 (138.9)

The 2014 deficit is not a precise guide because it is based on the scheme’s valuation in 2012. A lot has changed since then. Between 2002 and 2004, BHS paid out £423 million in dividends, mostly to the Green family. So the directors’ priorities were very clear.

In subsequent years, BHS was in a weak position to address the deficits as it made losses from 2009 to 2014. In 2014, it reported a negative equity of £256.2 million i.e. its liabilities exceeded available assets by £256.2 million.

BHS was technically insolvent, but could rely on its ultimate parent company for financial support and remain a going concern

From 2011 to 2013, BHS’s 2011 accounts said that ‘The directors believe that preparing the financial statements on the going concern basis is appropriate due to the continued financial support of the Company’s ultimate parent company Taveta Investments Limited.’

However, Taveta had negative equity from 2005 to 2012 and did not provide the resources to eliminate the deficit.

On 11 March 2015, BHS was sold to Retail Acquisitions Limited (RAL) for £1. The agreement, if any, to clear the pension scheme deficit is not known. The filings at Companies House show that RAL had a share capital of only £1,000, hardly a firm financial base to clear the pension scheme deficit or rescue BHS.

There are now two choices for the orphaned BHS pension scheme. It can be brought under the umbrella of the Pension Protection Fund (PPF), assuming that it has sufficient resources. The PPF will only cover a maximum of 90 per cent of the accrued pension, meaning pension schemes members will lose benefits.

The second option is to sell the scheme to an insurance company and ask it to honour the pension obligations.

This is not free money and insurance companies will levy fees and charges. Various estimates suggest that the preservation of pensions through this route would require an injection of about £571 million.

Failure to raise this money will result in heavy cuts in pension rights and a possible burden on taxpayers to support the unfortunate individuals.

Under the Pensions Act 2004, the Pension Regulator can intervene and examine ‘connected’ or ‘associated’ party transactions. These are transactions between BHS, its parent company, fellow subsidiaries directors, etc., as well as any public promises to provide resources (see above).

Depending on the facts, the Regulator can order the ‘connected’ party to make contributions to reduce the scheme’s deficit. Lengthy litigation is likely.

The BHS debacle once again draws attention to predatory capitalism. Shareholders and directors can hollow-out companies by extracting cash; and then dump the remaining shell and with it the pension deficiency on to employees and taxpayers.

This is unacceptable and requires fundamental changes in company law. The best option is a two-tier board for companies with more than 500 employees.

One tier, the Management Board, manages the company. The second tier, the Supervisory Board, elected by stakeholders, including employees, should supervise the Management Board.

Such a Board would have asked questions about the payment of excessive dividends, failure to make investment in the company and correct pension deficiencies.

This change is long overdue.

Prem Sikka is Professor of Accounting at Essex Business School’s Centre for Global Accountability

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14 Responses to “BHS demise shows the failure of predatory capitalism”

  1. Jackie Hilton

    Very good article, it is nothing short of scandalous BHS employees have been left in this position. Green should be made to pay back the dividends he and his fellow Directors have taken.

  2. Jaffer Manek

    This has too many similarities with the Robert Maxwell debacle some 30 years ago. Much was discussed and official enquiries made but it has arisen again. It appears the system is rigged for a certain fraternity to exploit UK’s businesses and British people whilst they live outside UK and park their ill gotten gains outside UK.

  3. Peter Sills

    Many thanks for another excellent article. Again we are faced with the moral deficit that underlies the financial deficit, indeed I would say the spiritual deficit at the heart of economic life. How any one could think that greed on this scale is OK is just beyond comprehension. Company law needs fundamental reform, so that companies are run not just for the benefit of the shareholders, or, more often, the management, but for all stakeholders, employees and the public included. We won’t make much progress without a proper conception of the common good.

  4. jay ginn

    Thanks for an excellent account. Another case of privatising profits and nationalising losses. Lets not forget the state had to take on pension liabilities of Royal Mail as a sweetener for the private sector to take it over; or the way pension liabilities are a bargaining chip in selling Tata Steel; or the collapse of the venerable Equitable Life when a new management prioritised share value, ignoring the risk to ordinary people’s life savings.
    Lets be constructive: German firms have a much better representation of employees on their boards (others may know the details) to check rampant and reckless short term pursuit of share value, yet the sky hasnt fallen in – far from it!

    Pursuing share value irrespective of other responsibilities are now seen in |France where we see the so-called socialist government riding roughshod over workers negotiated pay and conditions in the interest of Capital, with disastrous results for the whole of society.

  5. Prem Sikka

    Thank you Jay. You are right.

  6. Prem Sikka

    There may be a cure for those intoxicated with alcohol, tobacco and sundry drugs, but there seems to be no cure for intoxication with wealth, power and status. The irrefutable evidence is that we all come into the world empty-handed and leave empty-handed , but that does not stop some from amassing wealth that they cannot spend and make other people’s lives miserable in the process.

  7. Prem Sikka

    Thank you Jaffer. As someone once said “Those who fail to learn from history are doomed to repeat it”. So it is.

  8. Prem Sikka

    Thank you Jackie. The UK does not have any regulator for enforcing corporate laws. The system is partial and fragmented and all make excuses for doing nothing. The Bank of Credit and Commerce International (BCCI) was the biggest banking fraud of the 20th century. It was closed in July 1991, but to this day there has been no independent investigation.

  9. Alison Wunderland

    Company law is a thieves charter of impunity. How can this man get away with theft on a gigantic scale? There is only one recourse that I have found in such circumstances and that is to put liens on all of Sir Philip Green’s assets, and strip him of his knighthood. I see in the IP today that Green brought out the ‘anti-Semitic card after Lord Myners was critical of Green’s handling of the collapse of BHS and remarked “Thank goodness he didn’t succeed in taking over M&S! Typical of his ilk.

  10. Jimmy Glesga

    What they do is lawful. That means politicians are responsible.

  11. Prem Sikka

    Thank you Jimmy. Yes, the law is an ass!!. Corporations fund political parties and offer jobs of past and potential ministers. For £20,000 you can have a lunch table meeting with a minister at a party conference and bend his/her ear. Companies second staff to government departments and have reps on important law writing committees. Corporations also hold governments to ransom with threat of uprooting and causing economic crisis. Inevitably, we get laws that serve their interests. Bringing corporations under democratic control is one of the biggest issues for the 21st century. So far, we have failed and the outcome is BHS, banking crash and other debacles.

  12. Prem Sikka

    Thank you Alison. Great thoughts. Section 172 of the Companies Act 2006 gives some room for action. But I can’t see BIS doing anything and David Cameron going after one of his former advisers. Corruption is institutionalised and is often camouflaged by the rhetoric of business friendly government policies.

  13. David Crowther

    There has long been a problem with pension funds. Companies have been able to take a pension holiday when the fund is in surplus but are not required to make up a deficit. So we have seen 20 years of companies first taking holidays and making no contributions but then changing the conditions of the scheme when it moves into deficit. Arguable it is only in deficit because those contribution have not been made. This is not prudent behaviour by company directors and needs to be addressed

  14. Prem Sikka

    David, you are right. As long as schemes were in surplus companies were happy to skim them. No the schemes are in deficit, they don’t want to pay or return the foregone contributions. The consultation on Steel workers’ pension shows that the government’s preferred option is for the past and present employees to take a big hit. What can a 70 year old worker do when with a pension cut? The message is that directors and shareholders can rip-off companies. Then dump the shell and expect employees and taxpayers to bear the cost. As usual, the government is punishing the innocent party.

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