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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