Oral evidence: Pension Protection Fund and Pensions Regulator HC 55 Monday 23 May 2016

Oral evidence, 23 May 2016.

Witnesses

Ian Greenstreet, Partner, Nabarro, Tony Clare, Partner, Deloitte, David Clarke, Partner, KPMG, Richard Cousins, Partner, PwC, and Emma King, Partner, Eversheds, gave evidence.

Chair

Welcome. I wish to read a statement to you and then, if I may, give you some idea of the timetable we would like to work to. The statement obviously thanks you all very much for coming and gives you some context to our questioning. The Pensions Regulator, the Serious Fraud Office and the Insolvency Service have all written, assuring us that our inquiry is not impeding their investigations. We recognise, however, that the lawyers among you in particular may have obligations to your clients in terms of not disclosing information that is subject to legal professional privilege. We understand that Taveta and Arcadia have opted not to waive legal professional privilege in relation to advice provided to them. None the less, I am sure that you will want to help as much as possible, in a constructive way, in analysing these issues. That said, it is clearly your call how you use your professional privilege. If we are unhappy with it, we can go to your regulators to see whether they think you have called this correctly, and of course there is the possibility of bringing you back. I will chair the first session, and Iain will chair the two subsequent sessions. In our first session, while many Members will wish to come in, we have three main themes. Jeremy will lead on Project Thor. In true celebration year, Richard Bedford will do the sale, Richard Gloucester will do the recovery plan and Iain will look at the auditors. May I ask you to begin by saying who you are, for the sake of the record? Could you tell us your status within the companies, as opposed to the pension scheme, and how those two great matters weighed with you as professionals in the advice you gave? Emma, we will begin with you.

Emma King

My name is Emma King. I am a partner in the law firm Eversheds, and I specialise in pensions. My role and the role of Eversheds in this matter has been to advise the trustees of the BHS pension schemes, and at all times we were providing them with details of the legal and regulatory landscape within which to consider all of the matters that we will be talking about today.

David Clarke

My name is David Clarke. I am a partner with KPMG. I lead our employer covenant offering. We specialise in understanding and assessing the strength of businesses who sponsor final salary pension schemes. We were appointed by the trustees, and our initial role from our appointment on 19 February 2014 was to help the trustees evaluate the Project Thor proposal.

Tony Clare

My name is Tony Clare. I am a partner of Deloitte and a specialist pensions partner. We were advising Taveta Investments Ltd—the shareholder who is the owner of BHS Ltd. We were instructed to consider a restructuring of the company—BHS—and the pension scheme, with a view that all the members would receive a better outcome than the potential of going into the Pension Protection Fund and receiving compensation.

Ian Greenstreet

I am Ian Greenstreet. I am a partner at Nabarro, which is a law firm, and I specialise in pensions law. We were advising Taveta Investments Ltd and giving specific pensions advice, working alongside Deloitte, because there is a division of responsibility in this sort of area on the legal aspects and the financial aspects. Taveta Investments Ltd owned Taveta Investments (No. 2) Ltd, and Taveta Investments (No. 2) Ltd owned Arcadia and BHS Group at the time of the sale. Taveta Investments (No. 2) sold BHS Group. As a firm, we have provided pensions advice to various entities in the Taveta group since 2009, and we ceased providing advice in 2015 when the main client partner left to join another firm and took the business with her.

Chair

Ian, if I may, I will come back to you about that structure before I go to Jeremy.

Richard Cousins

I am Richard Cousins. I am a partner at PwC, and I am a pensions actuary. I have given advice to Taveta since 2009, when BHS was brought into the Taveta group. I ceased giving advice in relation to BHS midway through 2013.

Chair

Ian, we were given a diagram of the companies, and we have at the top of it Taveta Ltd in Jersey, Taveta Investments and Taveta Investments (No. 2). In your experience, where did the power lie?

Ian Greenstreet

The main UK holding limited is Taveta Investments Ltd. The ultimate controlling shareholder is Lady Christina Green and her immediate family, as stated in the accounts.

Chair

Right, and would she chair or did someone else chair the two investment companies?

Ian Greenstreet

She would not—she is just the ultimate, controlling owner, so the responsibility for any sale would rest with the board of Taveta Investments Ltd, which controls Taveta Investments (No. 2), although I suppose as Taveta Investments (No. 2) was selling—

Chair

Could you remind us who the chairman was during this saga?

Ian Greenstreet

Apologies—I would tend to deal directly through the company secretary. I believe it is Lord Grabiner.

Q202Chair

But whoever that chairman was, they would be responsible to Lady Green.

Ian Greenstreet

No, they would be responsible to the entity.

Chair

Right. Very good, thank you. I am still not clear, but no doubt we will come back to who was the key chairman.

Jeremy Quin

Richard, may I start with you? You ceased to be auditors to BHS in 2013—is that correct?

Richard Cousins

No. I know you are talking to the auditor a little bit later. I ceased acting, giving pensions advice, in relation to BHS in 2013.

Jeremy Quin

That is helpful. At that stage, how would you characterise the BHS pension scheme in terms of its health and ability to carry on as a going concern?

Richard Cousins

In terms of the pensions scheme in 2013, we had just completed the valuation process for the 2012 actuarial valuation and at that point it was very clear that the cash funding arrangements were at the long end—in other words, they were 22, 23 years, which you have to say for a pensions scheme is a serious concern.

Jeremy Quin

Absolutely extraordinary. In terms of the relationship between the pension fund and ultimately the broader Arcadia Group, I assume that you were looking for some reassurance. Obviously you have to look to the BHS board and BHS itself, but I presume you were reliant on there being a guarantee of some sort from the wider group to BHS.

Richard Cousins

No. When the valuation was looked at—the trustees used covenant advisers to look at that valuation—my understanding was that they were only looking at the BHS business that was the sponsor of the pension scheme at that time. So the pension scheme was only supported by BHS Group Ltd.

Jeremy Quin

Okay. Emma, you would have been providing legal advice to BHS’s directors at the time.

Emma King

No, the trustees of the pension scheme—

Jeremy Quin

The trustees of the pension scheme. The same question though: from their point of view, were they comfortable that they had full resources and could operate purely on the basis of BHS resources?

Emma King

Whether they were comfortable or not, that is the state of affairs. The only company that they could legally look to from a trustee perspective was the sponsoring employer, which was BHS.

Jeremy Quin

What type of process did they go through to reassure themselves about the adequacy of the situation they found themselves in?

Emma King

That is probably more an actuarial question than a legal question, because an actuarial valuation and the recovery plan put in place to deal with any deficit is very much led by the scheme actuary in terms of the advisory team. We were advisers at that time—we have been advisers to the trustees since 2009—but we played a peripheral role in relation to that valuation. That said, I understand that the trustees took specialist covenant advice as to what could be afforded by the company in relation to recovery payments, as has already been mentioned, and they took that advice in hand when agreeing the recovery plan that they put in place.

Jeremy Quin

From whom did they take that advice?

Emma King

I understand that was Baker Tilly.

Jeremy Quin

Okay. We have not got them here today, but we may well come back to them. I believe it was Deloitte who came in at the time of Project Thor.

Tony Clare

That is correct.

Jeremy Quin

Could you talk us through what you found in the pension scheme at the time, and then Project Thor and its objectives?

Tony Clare

Sure. There are two pension schemes: there is a staff pension scheme and there is a senior executive pension scheme. The senior executive scheme has a better funding level than the main staff scheme. This is a purely historical fact, I suspect just relating to the investment performance and the maturity of the different schemes. The staff scheme is an unusual scheme. In total across the two schemes there are about 22,500 members. But, given the history of the business as a retailer with part-time workers and quite a high attrition rate, a lot of the members have really got relatively low earnings and quite short service. So, of those 22,500 members, about 16,000 of them had a benefit that was relatively small, with a value probably of less than £18,000. We were instructed by Taveta Investments Ltd to review the pension scheme to see whether we could agree a restructuring that would protect the Pension Protection Fund and deliver the members a better outcome than the potential insolvency of BHS Ltd. At that point, we had been informed that BHS Ltd had been loss-making for seven or eight years consecutively, despite the best endeavours of management. It was a trading company only because Arcadia lent it nearly £200 million over that period to enable it to continue to trade. Of that £200 million, I would have thought that between £50 million and £60 million passed directly to the trustees as deficit repair contributions anyway over that period.

Jeremy Quin

Who instructed you on Project Thor?

Tony Clare

The directors of Taveta Investments Ltd.

Jeremy Quin

Okay, so it came from the top, rather than the BHS level?

Tony Clare

Correct.

Jeremy Quin

Without a Project Thor-type solution, what did you think was the prognosis for the BHS pension scheme?

Tony Clare

We were informed by our client that, as it had been loss-making for seven or eight years, the group was no longer willing to support those losses indefinitely, and that ultimately the business would go into insolvency if a solution could not be found.

Jeremy Quin

Can you talk us through what Project Thor would have involved and how you thought you could get a solution that would work in the interests of the pensions and the employees?

Tony Clare

I think it is important to be aware that Project Thor has three strands to it. One element is indeed the pension scheme. A second element is that the owners of BHS Ltd, who had lent over £200 million at that point to support the company, would write off their debt—certainly to the extent that they would have received a recovery in the event of insolvency, so they would not get any more. The other key suppliers and stakeholders to the business—primarily the landlords—would also take an impairment on their rents. So there were effectively three strands to it. On the pension scheme, the structuring was that those members I mentioned earlier, who have got relatively small benefits, HMRC have a particular rule that says that you can provide them with what is called a wind-up lump sum—a cash payment in lieu of a small pension payable many years hence. There is guidance set out by HMRC on how that should apply. Effectively, the part of the structuring of the pensions element is that those members would be offered on a voluntary basis the option, if they wish, to take a cash lump sum now or, if they wish, to transfer to a new scheme. The members who have got benefits above £18,000 could also transfer to a new scheme, but the proviso in the instruction we were given is that the benefits in the new scheme must be greater than the benefits that the members would have received through insolvency going into the PPF. The aim was to protect those members, but also to protect the PPF. Perhaps I should be clear that there was no expectation that we would be able to provide all of the benefit in full. The alternative was insolvency and compensation from the Pension Protection Fund. Project Thor on the pensions side was purely intended to offer people on a voluntary basis a better option and a better level of value than would be payable from the PPF. The cost of it would be met by Arcadia.

Jeremy Quin

Okay. Other colleagues will want to go into where the pension got to at the start of this process. All we are focusing on right now is where Project Thor could have led. How advanced did you get with the Project Thor discussions? Was it a fairly baked-out solution? Did you get to a scheme that you thought had a high probability of success? Where did you get to?

Tony Clare

We investigated the numbers and looked at the costings. We worked out that it was going to cost tens of millions of pounds. We approached our client and explained, “If you want to go down this solution, it will cost you, in addition to writing off the bulk of your inter-company debt, cash of several tens of millions of pounds.” The instruction was, “Well, if that’s what it costs, that’s what it costs. We need to deliver a better outcome for these members.” We then engaged in a transparent process with the trustees and their advisers, some of whom are sat here today. We provided full information about the proposals and the alternative, which was the compensation from the Pension Protection Fund following the insolvency of BHS Ltd. We had a robust and professional negotiation with the trustees and their advisers, and we reached a written heads of terms agreement with those trustees. Thereby, all the parties were supportive of the principles of Project Thor, which I have outlined—that members will receive optionality on a voluntary basis to have a better outcome than going into the PPF, and that the owners would write off the bulk of their debt, and would write the cheque to fully fund the pension scheme on a self-sufficiency basis going forward—

Chair

What do you mean by the term “fully fund”?

Tony Clare

There are various measures to fund the pension scheme. I would say this is one of the most difficult things to explain. What I mean is that the pension scheme has its own existing assets, and it needs a top-up payment because it has a deficit. We can all understand what the value of the assets are in the pension scheme; it is a monetary matter. It is the value of the assets that you can sell. On the other side of the equation is “How much money do I need today to pay all those pensions when they fall due over many years to come?”

Chair

But there is one way of doing that, isn’t there? It is to buy the scheme out with an insurance company.

Tony Clare

There are many ways to do it.

Chair

So if we are trying to think of ballpark figures, the figure mentioned for that is £571 million, isn’t it, or something like that?

Tony Clare

I believe that is the figure that was in the KPMG company voluntary agreement document.

Chair

But on this heads of terms scheme, those with small amounts could take their money and use it.

Tony Clare

Correct.

Chair

Those who had a slightly more substantial amount were offered a better deal. Was that a heading, or were there figures at this stage to guarantee them the better deal?

Tony Clare

The figures were calculated on an assumption that the moneys would be invested following the top-up contribution, and the investment return that would be achieved would be the return available on long-dated Government stock—long-dated gilts—plus an average return, over the long term, of 50 basis points, or 0.5% per annum more than gilt return.

Chair

What were the actual figures? They are pretty low, aren’t they?

Tony Clare

The figures at the time, when we did our first calculations, were based on the gilt yields prevailing at the end of December 2013, which is when we first got the data. I think the figure at that first point was £50 million to £55 million, with the expected top-up payment. That figure crept up to £80 million as gilt yields fell. The market conditions are not in the control of Taveta or indeed the trustees, so as gilt yields have fallen over the period, the cost of the top-up and indeed of the buy-out—the £571 million figure—has gone up and up and up.

Chair

On this, the aim was to make sure they got a better deal than being in the PPF.

Tony Clare

And to fund the pension schemes at a very high level to give them a high level of certainty that they would receive those benefits.

Chair

They wouldn’t drop back.

Tony Clare

Correct.

Jeremy Quin

I was going to ask why this fell through, which goes to the point of the scheme. You went to the regulator in July 2014, and at that stage, the regulator did not feel there was sufficient information to take a view on it, which seems to contradict the high level of certainty you had.

Tony Clare

Well, I think it is a question for the regulators why they didn’t feel they had sufficient information. What I would say is that Taveta, in accordance with our advice, had provided full information to the trustees and their advisers, but they had reached the same conclusion that we had: this was the best option. They were supportive of the heads of terms. We had a draft clearance application to the Pensions Regulator, which we had passed in draft, as we had agreed with the trustees and their advisers, for them to review. They had provided their comments, their comments had been incorporated and all the parties were supportive of reaching a compromise, which you should remember is only one leg of the three that applied to Project Thor. The owners of the business had committed to writing off their debt, and to writing the cheque to top up the pension scheme. If we had the clearance of the regulator, we still had to go to the landlords and suppliers to agree that they would also reduce some of their terms.

Jeremy Quin

Just to clarify, you said that the trustees and their advisers were on board with the plan as it had been formulated; there was an agreed heads of terms between you. The other people are nodding.

Tony Clare

That is correct.

Jeremy Quin

So you are all in agreement on that. Why didn’t you put in a proper formal application to the Pensions Regulator?

Tony Clare

We were proposing to do that. The clearance went in in draft, for discussion purposes. In terms of our process, if I remember correctly we first notified the regulator in early July—from memory, 7 July. We had quite a long, detailed conversation with the regulator on 10 July to explain what is, in fairness, quite a complicated restructuring—this is not a plain, vanilla-type solution. We took them through that on 10 July. The regulator then reverted back to the trustees and their advisers to hear their opinion on whether they were in agreement and why they were supportive of it, so they were doing quite a lot of due diligence at that point. It was in draft, so if we needed to make any amendments following that proper, open and transparent consultation process, we could still do so. The ultimate aim was to put in a final draft clearance that would have been penned by the owners and the trustees supporting that application.

Jeremy Quin

I am trying to work out which person on the panel is best able to talk to the trustees’ viewpoint on the scheme. Is KPMG able to posit a view? I have heard various contradictory points. My understanding was that the trustees were not wholly convinced, or had not seen enough detail at that stage to be able to sign off on Project Thor. Can either Eversheds or KPMG help on that point?

David Clarke

From a financial perspective, as Tony has noted, these structures are quite complicated and have a number of hurdles. One of the key issues that needs to be addressed, as is perhaps evident to you, is what the scheme would receive by way of an insolvency if this type of restructuring did not take place. During early 2014, a big piece of our work was trying to take a draft estimated outcome statement, which was prepared by Deloitte and set out its view of what the schemes would receive in an insolvency, and see whether we agreed with that, because that number, or the number that resulted from that process, was acknowledged as one of the drivers for the level of funding that would be provided to the scheme. As you can imagine, trying to prepare that type of analysis for a sub-group such as BHS is complicated. There are a number of very significant assets—properties and so on—and liabilities, such as landlord claims. We had a number of exchanges with Deloitte in respect of its estimated outcome analysis because, to be open, we didn’t agree with some of the assumptions it made, although there is an area of judgment to be applied here. The discussions took place for several months, but I concur that, in principle, faced with the alternative of insolvency, the trustees were supportive of investigating and pursuing a Project Thor-type proposal. From my recollection, it is not the case that by the time we got to the draft clearance application, all the numbers and analysis had been bottomed out and agreed.

Jeremy Quin

Presumably that is what the regulator’s problem was. That is for the regulator to say, but it was still asking for information at the end of July 2014. As I understand it, that wasn’t forthcoming, and I just wonder why that was the case. Was it that you were having second thoughts on the Project Thor proposal, or were the numbers just not there at that stage?

Tony Clare

No, I think Mr Clarke expressed it very accurately: we were still trying to agree where the actual estimated outcome statement figure would be. It is not a matter of fact; it is a matter of judgment. We recognised that it went in in draft, and that figure was still blank in the document. One of the principles we had agreed with the trustees in the heads of terms is that the cost to the owners of BHS—their cash cost—has to be greater than the recovery the trustees would get through the alternative, which is insolvency. That is a matter of principle that was accepted by the parties. That figure was then up for debate among the parties until they finally reached an agreement on what it would be.

Jeremy Quin

So why was there this pause for the regulator? The regulator was asking for information and that was not forthcoming, and Project Thor was put on hold. Talk us through what actually happened with that. You weren’t putting in a final application, so it is not fair to blame the regulator, because it never had a final application from you to say, “This is what we want to do.”

Tony Clare

That is true. We were through the period of the summer and into the autumn of 2014. As you can imagine, this is a significant distraction for the management of the group. This is taking up all of their time as they approach what, for a retailer, is their most critical period of trading—coming up to Christmas, and making sure they have the right stock and a strong Christmas trading period. Therefore, management took the view that they wished to pause the Project Thor engagement and to revisit it in January. The management would focus and try and turn around BHS over Christmas to improve its trading. As a consequence, we were instructed to notify the Pensions Regulator that we wished to pause Project Thor, and to focus on trying to turn the business around and improve its trading over Christmas. We sent that notification to the Pensions Regulator. The Pensions Regulator then wrote back and asked our client to formally withdraw the clearance application. Our client was concerned at the time that if they withdrew the application, albeit it was in draft at that phase, we did not want to go back and start from square one if we concluded, following the Christmas trading, that insolvency was inevitable. However, the regulator had a telephone conversation with Deloitte and was keen that we asked our client to withdraw the clearance application, so we did. We notified the regulator that the application was withdrawn, but that if we resubmitted it in the new year, we hoped we would get exactly the same team and that there would not be any undue delay in getting up to speed on what was, we fully concur, a complicated restructuring.

Jeremy Quin

Thank you. David, you must have been upset about that. This was a missed opportunity for the pensioners.

David Clarke

First, if it is helpful, I concur with the timing. The trustees were notified by the group, and I think by Deloitte, on 5 September that Thor was going to be put on pause, and then the clearance application was withdrawn on 17 October. The chairman of the trustees, Mr Christopher Martin, who I think you will be seeing later in the week, had numerous discussions around that time with the group and pointed out that, having been told that effectively there was a risk that support would not continue to be provided to BHS, and that BHS was a struggling business, the schemes effectively had a zero covenant from that point in time and something needed to be done to make sure that the schemes were safeguarded. While it is not my area of expertise, that, for instance, triggered a review of the schemes’ investment strategy to make sure that there was not the risk that that could not be covered by the legal entities responsible for supporting it. It was a difficult situation. The messaging was the same: revisit in late Jan, after the Christmas trading. The trustees made it very clear that that left them with a challenge over the intervening period.

Jeremy Quin

Where do you lay the fault for not getting it done and secured in the summer or early autumn?

David Clarke

As Mr Clare has said, these are very complicated scenarios with multiple stakeholders who need to find agreement. The trustees engaged. It was better than insolvency. I am afraid we get to September where we were informed that Thor is on pause. We were not privy to the discussions between the regulator and the group as to exactly why that was decided.

Jeremy Quin

Shouldn’t you have been leading those discussions? Surely it is normally the trustees and their advisors who talk to the regulator, rather than a third party.

David Clarke

Clearance, which is the process used, wrapped around Project Thor, is a company-led initiative—a company-led process. It is not something the trustees can do. Trustees cannot submit a clearance application to the regulator.

Jeremy Quin

But the trustees have to sign off on their satisfaction of it.

David Clarke

The trustees have to add comments in one paragraph in a clearance application. A clearance application is normally 15 pages.

Jeremy Quin

Do you feel the regulator acted properly and efficiently on the information that was provided to it?

Emma King

From my perspective, as we have discussed, the regulator received the application in draft. Before it really went anywhere, there was a decision taken, as we have heard, to have a change of approach and to pause the project until after Christmas trading, so I am not sure—

Jeremy Quin

So at no stage did they have a final application. I have one last question, Chair, if I may. We are all aware that there are other companies with schemes that may also be in similar difficulty. Do you think the Project Thor approach was unusual? Do you see this as a positive attempt by the company to find a positive solution better than the PPF for the employees and pensioners, or was it just making it slightly prettier for a future sale?

Tony Clare

It was certainly not the latter; a lot of time and effort went in. Just to give you a flavour, Mr Quin, we were instructed to go down to extreme granularity, looking at the benefits under every scenario. We were looking at such situations as the benefits paid to multiple orphans in the event of a member dying under the PPF or dying under the new scheme, and ensuring that all beneficiaries are better off under every circumstance that we can envisage. There is a lot of work looking at all those factors and what the pay-outs would be. The first part of your question was around whether this is an option for other schemes that are in difficulties. The answer has to be yes; it is not a unique situation. For example—these matters are in the public domain—the Kodak pension scheme went through a similar restructuring. Members were offered a wind-up lump sum or a transfer to a lower benefit that was higher than what they would get from the Pension Protection Fund. A similar restructuring was done with the Uniq pension scheme—the former Unigate dairy pension scheme—and those members got a similar outcome: a better outcome than they would have done from the PPF.

Jeremy Quin

So—this really is my last question—is there anything further that could be done? We all want to be in a situation where we do not need to look at restructuring—that is self-evident—but in circumstances where restructuring is required, is there more that could be done from the regulator or the legal environment to ensure that these schemes can be more easily processed and put in place? Perhaps David wants to answer that question first, which will give you a chance to pause for breath, Tony.

David Clarke

As Mr Clare has noted, these type of arrangements have been done before. I have personally been involved in a number that have worked and avoided insolvencies, but they are complicated and they are not common. They are not common partly because of the level of complication.

Jeremy Quin

But there is no obvious impediment that any of you can look to and say, “If you sorted that out, it would make it easier for these things to work for the benefit of pensioners in the future”?

Tony Clare

If the principle was accepted that it is better for members to have a benefit greater than the PPF compensation and to protect the PPF as a statutory objective, that would give greater impetus, I think.

Chair

That is really helpful.

Amanda Milling

This is a question to both Mr Clare and Mr Clarke, but first to Mr Clare from Deloitte. You said that the trustees were presented with Project Thor in January. In the autumn, it was paused because of trading conditions and the concern that it would take too much time. I am interested in understanding when Project Thor started in terms of beginning to come up with the concept and idea. How much time was taken before January 2014—before it was presented to the trustees?

Tony Clare

Before January 2014. We were only engaged formally in January 2014 to provide pensions advice. In advance of that, I had been asked whether we could think of anything that could deliver a better outcome for the members than the consequences of insolvency, and I had given some thought with colleagues as to what the options were and whether anything at all could be done. We met the directors of Taveta to talk through, effectively I would say, what is the art of the possible, in advance of January. Was a great deal of time and effort put into that? I would not say it was a great deal of time at that stage of the proposal. It was more about the potential options we could do to give these members a better outcome than they would receive from the Pension Protection Fund.

Amanda Milling

There is another aspect of this that I want to understand. You said that you were liaising and having discussions with the trustees from January. Why did it take several months before you started to talk to the regulator about something that was a pretty significant major restructure of the scheme?

Tony Clare

Because it takes time to inform all the trustees that the best option available is a restructuring such as Project Thor. It takes time to undertake all the necessary actuarial calculations. It takes time to analyse all the beneficiaries and to be comfortable that everyone will be in a better position than under the alternative of going to the Pension Protection Fund, and it takes time—quite rightly—for the advisers to the trustees, in supporting the trustees, to take a sceptical line on whether something is really the best that we can offer the members of the BHS pension schemes. It takes time for them to challenge it and to apply due rigour to reach the conclusion that, regrettably, this is the best that can be offered under the circumstances.

Q240Amanda Milling

Mr Clarke, what is your view on this time period and the discussions with both the company and the Pensions Regulator?

David Clarke

I was only appointed on 19 February 2014—we were appointed directly to deal with Thor—so in terms of your initial question, I do not know what happened pre then. On the day we were appointed, we submitted questions through Deloitte as advisers to the group in respect of Project Thor. They centred on two points; one was, “Was BHS Ltd, as the sponsor to the scheme, unviable on a stand-alone basis?” Clearly, if it could have continued to trade and support its schemes in the normal course, you would not have needed Project Thor. The second question was, “If there was an insolvency, what would the schemes, as an unsecured creditor, recover?” As I mentioned earlier, that figure was a driver of the offer being made to the schemes. We issued our initial report on those two points on, I think, 7 April, but it was not complete—there were gaps. We were still liaising with the group, and indeed Deloitte, on the information. My recollection of events is that once it was clear that this was something that the group was seriously considering, that it had understood the likely funding cost—Mr Clare pointed out that that would have been tens of millions of pounds—and that it was engaging fully with the trustees, rather than testing a proposal that might be put back in its box once the costs were understood, the regulator was then made aware of it, because it looked like something that was going to be proactively pursued by the group. My memory is that the trustees informed the regulator of Project Thor in early June 2014.

Amanda Solloway

I am just thinking about the pause that you have been describing. I get that, for retail, the period before Christmas is clearly busy, although I think that a lot of retailers will say that January, when it is suggested that it started again, is potentially one of the busier ones. When we say it was too busy, was it that it was too busy to do the Thor project, or was it the belief that Christmas would possibly trade out of the situation? If that is the case, who was involved in the Thor project who could not be involved in it because they were involved on the retail side, if that makes sense?

Tony Clare

Your questions are perhaps better addressed to the management of Taveta at the time. My recollection is that the decision to pause Project Thor was based on a concern of the group—not just BHS but Arcadia—that both retailers and management needed to focus on the day job. Therefore, there was a distinct possibility that BHS could have a strong trading Christmas and could stem the losses. There was a question of whether it could it perform well enough to continue to merit the support of Arcadia.

Chair

Tony, the managers were not negotiating with you, were they? I assume that during the year companies make decisions about what they are going to sell at Christmas and they then get that into the shops and all sorts of people help to sell it, but these negotiations are not really to do with the Christmas trade, are they? You were not asked to turn up to help in the activity. I can see that there is a strategic role for some people who might be worried about what trade is happening over Christmas, but that has already been decided, hasn’t it? If it was a bad period at Christmas, it made these negotiations more, not less, important, did it not?

Tony Clare

I fully accept that. If I have given you the impression that store managers were involved in these negotiations, that is not the case.

Chair

No, you said that the store management were busy. Of course they were.

Tony Clare

Correct.

Chair

The team doing this negotiation were not selling goods in the shops, were they?

Tony Clare

No, they were not front-of-house retail staff. They were finance staff within the head office function. They also clearly have an important role during the busiest part of trading on the cash flows and the profitability of the business.

Chair

To see what’s happening, sure. But it could have been called either way, couldn’t it? Could it have been more or less important to get it through?

Tony Clare

I don’t know the answer to that question, Mr Field. I think it is really one for the management of Taveta.

Chair

Yes, but if one is interested in the pensions.

Richard Fuller

I am conscious of the time, so I shall be quick and move on. We have had chapter one. Chapter two is the time of the sale of BHS to Retail Acquisitions or Swiss Rock, as it was known previously. Maybe this question is just to the advisers at the Taveta level. Mr Greenstreet from Nabarro, when was your firm alerted to the sale?

Ian Greenstreet

We were formally instructed on 27 February. I think we were aware that a sale might be in the offing in about mid-February.

Richard Fuller

So for that specific company, you were aware for how long before it was publicly announced? It was about three weeks, wasn’t it?

Ian Greenstreet

About that.

Richard Fuller

And you, Mr Clare: when was Deloitte advised?

Tony Clare

We were notified of the potential to dispose the business—

Richard Fuller

To Swiss Rock/Retail Acquisitions specifically?

Tony Clare

No, not specifically. We were notified in early February that a number of parties had approached—unsolicited, I understand—Taveta with a view to purchasing BHS.

Richard Fuller

So my question was: when were you alerted to the sale to Retail Acquisitions?

Tony Clare

When was I notified the sale had completed, or when it had exclusivity?

Richard Fuller

You were advising Taveta on its pensions, I guess.

Tony Clare

Correct.

Richard Fuller

And you were about to have a sale of a pension fund that had enormous deficits. When was your firm advised that a sale was being made to Retail Acquisitions? Mr Greenstreet from Nabarro knew in the middle of February. When did you know?

Tony Clare

Perhaps I should be clear about our role. We were not the corporate financial advisers to Taveta on that sale. We provided pensions advice in advance of that on the Project Thor restructuring option. We were notified that a number of people were bidding, including RAL, as it became. We were instructed on 6 February to notify the Pensions Regulator that the company was likely to be sold. When we got down to knowing the preferred bidder was Retail Acquisitions, it must have been some time after 6 February. I would have to check when we were informed that it was the only bidder that was likely to continue.

Richard Fuller

So it’s a bit vague at the moment as to whether Deloitte should have known or did know about the sale to Retail Acquisitions. Is that a fair summary of what you just said?

Tony Clare

No, I don’t believe it is.

Richard Fuller

Well, I am not quite clear myself.

Tony Clare

Perhaps it might help if I were to reiterate it. We were notified, in the first week of February, that management had been approached by third parties with a view to purchasing BHS. We were asked to notify the Pensions Regulator of that change of events and circumstances on 6 February, which we did. We were not instructed to support or assist Taveta Investments in negotiations with any party in terms of price, structure, approach to the disposal, terms and so on. I am not party to when Taveta decided that the bidder it would choose to sell to was Retail Acquisitions.

Richard Fuller

To be fair, I am still not at all clear about when Deloitte did or did not know. That is from your own recollection, but perhaps you need to go back. At the moment, let us just assume that you learnt about it in the newspapers after the sale was completed. Is that fair? You were not actually involved in making any assessment about Retail Acquisitions Ltd.

Tony Clare

We were not involved in making any assessments whatever on Retail Acquisitions Ltd.

Richard Fuller

Thank you. Mr Greenstreet, you did know about it. What role did Nabarro take, specifically on the pensions?

Ian Greenstreet

It might be useful to explain what lawyers do. Lawyers typically do not get involved until you have heads of terms, because if you instruct too early, you can incur more costs. We became involved after the heads of terms had been agreed, and our role as pensions advisers—we were working alongside Linklaters, who were dealing with the main corporate aspects of the deal—was specifically to provide pensions advice. Typically, in a transaction of this sort, a pensions lawyer will negotiate the warranties with the buyer and prepares things like statements. There are no other pension schemes apart from these schemes. There is no litigation. We will be involved in a disclosure exercise, and we will also be involved in advising on pension law matters generally, in so far as they may impact on the transaction—the regulator’s powers, and things like that.

Richard Fuller

In terms of the future viability of the pension scheme, what was your assessment?

Ian Greenstreet

That would not be the role of the pension lawyer.

Richard Fuller

So that was not part of your responsibility?

Ian Greenstreet

No.

Richard Fuller

Maybe I could ask the two advisers at the BHS pension fund. When did you become aware, Ms King, of the sale to Retail Acquisitions Ltd?

Emma King

The trustees were first informed that a sale was a possibility, rather than an unpausing of Project Thor, in very late January or early February. Thereafter, the trustees and advisers asked a series of questions as to what that sale might look like, who the sale was going to be to, et cetera. We also assisted in providing some documentation on pensions as part of the due diligence exercise. That documentation went to Arcadia, presumably to supply to the purchasers.

Richard Fuller

Specifically, when did Eversheds become aware of the sale to Retail Acquisitions Ltd?

Emma King

The trustees attended a meeting with Arcadia on 4 March. At the end of that meeting, I understand, one of the shareholders of the purchaser attended, and we were briefed, as a consequence of that meeting, by our client as to the identity of the shareholder.

Chair

These are incredibly important events, but people are rather vague about dates. You said that you first heard about it at the end of January or the beginning of February. Did a letter arrive, did a phone call come or did someone have a conversation with you, or what?

Emma King

On 2 February my trustee clients were asked to sign up to confidentiality agreements. Ahead of that, I think there had been press speculation that there might be a sale, which prompted questions on the part of my clients as to what was happening.

Chair

But you had no other information from the company, other than what you read in the press, until 2 February when you got something actually written down?

Emma King

It was a request that, before any further information would be provided, we sign up to confidentiality agreements.

Mr Wright

Very quickly, to Mr Clare—I should declare that I worked for Deloitte until 2003—when did your work with Project Thor come to an end?

Tony Clare

Our work on Project Thor came to an end—“paused” might be a better way to express it. We were invited to attend a meeting with our client and Retail Acquisitions Ltd on 18 February. The purpose of that meeting was to explain to Retail Acquisitions Ltd and their advisers, Olswang and Grant Thornton, how Project Thor—which is complicated, as we have covered—was constituted, how it would work, the level of engagement with the trustees and their advisers, and where we had got to. It was a question and answer session, and at that point we ceased to be involved. There was a pause on Project Thor. We were not advisers on that transaction—the only role we played was to pass information as to where we had got to on the pensions work pre-disposal. We effectively ceased to be engaged, probably for the best part of the year.

Chair

Did they give you a letter at some stage to say “Thank you, that’s it”?

Tony Clare

No, Mr Field. We never received that letter.

Mr Wright

Did you just pull off your engagement team at a certain time, and then you were paid up until that point?

Tony Clare

That is correct.

Mr Wright

And that was 18 February? Did I hear you correctly?

Tony Clare

We stopped providing pension services on 18 February because the business was sold shortly thereafter. We were re-engaged back in January 2016.

Richard Fuller

You are all advisers to the various parts of this company, a sale is about to be made of British Home Stores to a group whose lead has been identified as once, twice or three times bankrupt, there is no retail experience in the team and there are questions about its funding as it made the acquisition. In the interests of time, I just want a quick yes or no: did your firm formally express any concerns about the capability or competence of Retail Acquisitions as an acquirer? Yes or no? We will start with you, Miss King.

Emma King

No, because that was a question for others. From the trustee perspective, it is not for the trustees to judge who a potential purchaser of a sponsoring employer should be.

Richard Fuller

Mr Clarke?

David Clarke

In my capacity as financial adviser to the trustees, we submitted numerous questions on 25 February in respect of the potential purchaser, including what working capital facilities they would have, what security package would go in place, the deal timetable, and whether the buyer had started pensions due diligence and so understood what they were acquiring. We would have done that whoever the acquirer was, but we were aware that, from our perspective, the buyer was effectively what appeared to be a newly set-up acquisition newco that was set up specifically for the purposes and so had no trading history. There was no ability to look at past accounts, for instance, to see where it was coming from and we were particularly concerned as to its ability to continue to trade and fund both BHS, which was clearly loss making, and the schemes.

Richard Fuller

To be clear, you did express—your firm expressed—a series of questions about the potential viability of the acquiring company?

David Clarke

We did, which were submitted to the group and their advisers in writing, at least on 25 February.

Richard Fuller

Thank you. Mr Clare, from Deloitte’s point of view, did your firm formally express any concerns about the competence and capabilities of the acquirer?

Tony Clare

We did not. We were not instructed to do any due diligence on Retail Acquisitions. At law we follow our contractual obligations and do not go beyond, so we did not do so.

Richard Fuller

Thank you. Mr Greenstreet?

Ian Greenstreet

I am a bit constrained in what I can say about advice, but I would comment generally that it is not the sort of thing that pension lawyers would normally advise on.

Richard Fuller

Okay. I will take that as a no—my interpretation. Mr Cousins, for PwC it is probably more of a question for your colleague at the audit level. I don’t know if you wish to go and be briefed so you can answer the question yourself.

Richard Cousins

Only inasmuch as the only information that I ever passed to them around a potential sale, without knowing the details of the purchaser, is to ask questions over the moral hazard, but they were already looking into that. The instruction I got back when I asked the question, when I heard of it for the first time, was, “We are already in dialogue with the regulator.”

Chair

Before I give Richard Graham the question, could I quickly ask all of you a question? At this key point of the negotiations, did any of you yell out, “What about the regulator?” Emma, did you at this stage think the regulator had a role here, please?

Emma King

Absolutely. As soon as the trustees were told that a sale was a possibility, we informed the regulator of that. Throughout these discussions that are being referred to, to try to find out as much information as we possibly could about the potential purchaser and about the sale, we involved the regulator.

Chair

Emma, can you remember the date you did that, please? I can come back to you if you’re looking at notes.

Emma King

Yes. Can you come back to me?

Chair

I would love to. David?

David Clarke

The trustees gave an initial update to the regulator on 29 January 2015. They provided a fuller email update on 25 February, including some of the questions that had been posed. As Miss King has already noted, there was an all-party meeting, which neither of us was at, with the trustees and the buyer on 4 May—sorry, March, forgive me. The regulator was involved.

Chair

I will come back to you, if I may, David, on what the regulator did, because you sent two communications. Tony, did you think the regulator was relevant here at all, or was it irrelevant to your frame of reference and your duties?

Tony Clare

Clearly, we have a duty to act in all the public interest and we discharge our work in accordance with all our professional guidance, objectivity, integrity and so on.

Chair

Did you tell the regulator what was going on?

Tony Clare

Yes, as I explained earlier, Mr Field, we were instructed by our client to notify the regulator on 6 February, and we sent an email to the regulator on that date confirming that the business would be put up for sale.

Chair

Great; and did you have any response?

Tony Clare

I could check the file, but I don’t think we did until 3 March. I would have to check the file; I don’t want to mislead you.

Chair

If you could. It is very important. Ian?

Ian Greenstreet

I am afraid I can’t comment on specific advice we gave or didn’t give in relation to the transaction.

Chair

Richard?

Richard Cousins

As I said a moment ago, when I heard about it at the meeting on the 25th when I was discussing Arcadia pension arrangements with them I raised the issue of “I’ve heard about a transaction—have you told the regulator?” and was told they had.

Chair

The date, again, Richard?

Richard Cousins

That was 25 February.

Chair

And which meeting was that, where you raised that?

Richard Cousins

It was an Arcadia pensions meeting with the team that looks after the Arcadia pension schemes, which I advise over.

Chair

Can I just ask Emma and David, what response did you get to your email or emails to the regulator, please; and when did you get them?

Emma King

The regulator wrote to the trustees by email on 12 February—quite a lengthy email setting out what—

Chair

Can you remind me? That was in response to what?

Emma King

That was in response to the trustee informing the regulator of—actually it was probably in response to the company notice on 6 February.

Chair

6 February—and the regulator replied when, please?

Emma King

The regulator emailed the trustees on 12 February to remind the trustees of the duty to mitigate any financial detriment that might be caused in consequence of a transaction or sale such as this, and of its moral hazard powers.

Chair

And did they suggest a meeting with you—the regulator?

Emma King

I can’t recall that they did suggest a meeting at that moment.

Chair

If not, you will correct the record for us, won’t you?

Emma King

I will.

Chair

David, you sent your emails in; what was the response from the regulator, please?

David Clarke

As I mentioned—I am probably just repeating—on 25 February we submitted queries in respect of the sale and the potential acquirer to the group and their advisers. On the same day the chairman of the trustees wrote to the regulator explaining what questions had been asked and also pointing out that the potential purchaser, whom he had met with, was well aware of the pension obligations that were being taken on. The Pensions Regulator emailed back that same day requesting an urgent call or meeting, and a call was held the next day on 26 February.

Chair

Brilliant; thank you all very much.

Richard Graham

I want to lead us back, in a sense, to the beginning of some of your appointments. Can we start with you, Emma? You were appointed in 2009. Can you just confirm, first of all, who appointed you and who were there already as advisers or consultants to the pension scheme?

Emma King

Yes, Eversheds was appointed in 2009. Personally, I joined the team in January 2014, so forgive me if I am a little hazy on some of the detail, here. I can come back to you and confirm in writing if it is important to you. The appointment was from the trustees of the pension scheme.

Richard Graham

Yes; were you aware that they had any other advisers at that time?

Emma King

The actuarial advisers throughout our appointment, I believe, have been Towers Watson—now Willis Towers Watson—on the actuarial side. I can’t recall any other advisers other than Baker Tilly, who I referred to previously as specialist covenant advisers.

Richard Graham

So during that period 2009 to 2014 Eversheds were the legal advisers. Did you have any contracts working for Taveta, Taveta Investments, Arcadia, BHS or any of the other groups that had a—

Emma King

Not as far as I am aware, no.

Richard Graham

And who paid Eversheds’s fees? Was it paid by the pension scheme or by the corporate?

Emma King

I will have to confirm to you, but it would be usual for it to be from the pension scheme, although in some circumstances the company does pick up the trustees’ legal costs.

Richard Graham

Some of these questions may be difficult for you, given that you joined the team in 2014, but I would be very interested to know: when Eversheds were appointed in 2009 almost the first thing that your company would have had to do was advise on the 2009 triennial review. At that stage, when the triennial review was submitted, in June 2010 the Pensions Regulator opened a funding case to challenge the trustees on the recovery plan—whose length was 12.5 years at that time. In mid to late 2010: “the Pensions Regulator learned the trustees negotiation had secured improvements over the company’s original recovery plan”. Do you know what those improvements were, and how they were arrived at?

Emma King

I’m afraid I cannot help you with that, not only because I was not on the team at the time, but because my understanding is that Eversheds was not actively involved in those discussions, which were led by the actuarial advisory team, the scheme actuary.

Richard Graham

But as the legal adviser, surely you would have played a role in giving advice?

Emma King

A legal adviser’s role in relation to valuations changes from client to client. Some clients like legal advisers to be very involved; others do not. It seemed to be very much an actuarial-led discussion. We would set out the framework for the trustees—the regulatory framework within which they have to operate in terms of valuation—but then, in terms of negotiating the detail of the funding to come in, that is much more dealt with by the scheme actuary, rather than the lawyers. It was not unusual that we were not closely involved.

Richard Graham

So the negotiation with the company was purely on the valuation, as far as you know.

Emma King

I wouldn’t know.

Richard Graham

The Pensions Regulator decided to close the case in March 2011, with comments to the trustees about what to focus on for the next valuation—do you know what those comments were?

Emma King

I am afraid I don’t.

Richard Graham

It would be useful, Chair, if Eversheds could come back to us with comments on that point. In 2009, the deficit on the pension scheme had deteriorated from £61 million in 2006, but it was just the beginning of an escalation in the deficit. What was your understanding of the reasons for that?

Emma King

Again, this is more an actuarial than a legal question, but if you look at many—or all—defined benefit pension schemes in the UK, you will see that the deficit has been increasing. Some of that has been to do with yields, some to do with longevity—

Richard Graham

Indeed. But this one deteriorated at a pace unknown to most defined benefit schemes. The actuarial adviser during this period was Towers Watson. Was it Watson Wyatt, as was, or was it Towers Perrin, as was?

Emma King

That I don’t know.

Richard Graham

Again, Chair, it would be useful to know who the actuarial adviser was during this period, and for us to see them. During that period, also, Emma, I think I am right in saying that the corporate was receiving advice from both PwC and Nabarro. Did your colleagues ever express to you some concern that the corporate was getting rather more advice than the pension scheme? What was your assessment of the competence of the trustees?

Emma King

The first part of your question I am afraid I am not really able to answer. You have cited another law firm, so the company had a law firm advising it, and the trustees had a City law firm advising them—there was that sort of parity. PwC were advising the company, and I have mentioned the Baker Tilly advice, which would be employer covenant advice for the trustees. It would seem to me that there is parity there, in terms of the advisory piece. On the second part of your question, about the competence of the trustees, I think it would be helpful for me to explain to the Committee the composition of the trustee board. There are three trustees, and at all times there have been two independent trustees, by which I mean—

Chair

Two of the three?

Emma King

Two of the three are independent—by which I mean, independent completely of the company. Then there is a third trustee, which is a corporate trustee, BHS Pension Trustees Ltd, and that is staffed with two member-nominated directors—individuals who are nominated by the membership to take up that role—and two employer, or company-nominated directors, but that corporate has one vote. So if—

Chair

Do they all turn up? Or can they all turn up, but have only have one vote?

Emma King

They can all turn up. The individuals who are in the BHS business can all turn up, but, ultimately, that corporate entity has one vote, so the two independents would always have the majority.

Richard Graham

Thank you. What was the relation between the pension scheme and the corporate? Of the two members you have just described—nominated by the corporate—was either of them, for example, the finance director?

Emma King

No, neither of them was the finance director. I think one of them did have a role within the finance function of the pension scheme. There will have been a change of individuals over the course of time. Would you like me to take you through the different stages of who, to my knowledge, was on the trustee board?

Richard Graham

No, but I think it would be useful to have that in writing, please.

Emma King

We could do that.

Richard Graham

The next major moment in the pension scheme, of course, was the next triennial review in 2012, which was significantly delayed. Why was that?

Emma King

My understanding is that it was delayed by three months after the deadline. There is a 15-month period within which the actuarial valuation has to be completed and all the documents have to be submitted to the Pensions Regulator. My understanding is that that was submitted at 18 months, slightly over the deadline, but with the regulator having been informed that there would be a slight delay.

Richard Graham

What was your understanding of the key reasons why it was delayed? For example, what was the connection between that and the recovery plan, which suddenly had more than doubled from what it was at the previous triennial review?

Emma King

Before I answer that question, I should probably outline again that Eversheds was not involved in those discussions in that level of detail. My understanding, from having spoken to my clients, is that they were taking independent covenant advice, and that might have been a cause of some of the delay. There were also discussions going on with the company as to the length of the recovery period, what the company could affordably pay towards the pension scheme and, indeed, whether there was any possibility of any type of security that could be offered to the pension scheme.

Richard Graham

So what exactly was the legal advice that you were giving the trustees, especially during the period when you came in, in 2014, when the Pensions Regulator put a comprehensive request to the trustees for further information? That continued for quite a long time during 2014. A meeting was requested. However, due to trustee adviser availability, it could not be arranged until July. In June 2014, the trustees notified the Pensions Regulator of a company proposal for business reorganisation. What was your role and your advice during that period?

Emma King

Throughout that period, the trustees were conscious that there was an ongoing and open case with the regulator in relation to the valuation. We would provide advice to the trustees as to the regulatory landscape in that regard and supply the regulator with any information required. Moving into Project Thor, our role was to make sure that what was being proposed was going to be in the best interests of members taken as a whole.

Richard Graham

At what stage did you start advising them of the Pensions Regulator’s ability to launch an anti-avoidance investigation?

Emma King

The trustees were given regular information from us in training sessions, as well as during the course of meetings, as to regulator powers. The trustee board at the time of Thor was composed of two professional independent trustees who were very well aware of the powers available to the regulator, and the whole Thor discussion was set against a very clear knowledge on the part of the trustees of the regulator toolkit.

Richard Graham

Deloitte earlier talked about having robust negotiations with the trustees. I am assuming that that is in 2014. How would you characterise those negotiations, and what was the negotiation?

Emma King

Our role in relation to Project Thor, with David and myself advising the trustees, was to play the sceptic—to challenge what was being put forward, to challenge the financial propositions and to make sure that what was being proposed would actually work from a legal perspective and would give better value for members in the long run.

Richard Graham

David, as KPMG, were you providing actuarial advice or investment advice at this stage to the trustees?

David Clarke

No, I was providing advice to the trustees on the strength of the businesses that were currently supporting and would potentially in the future support the scheme. I was providing advice to the trustees about what they would recover in a hypothetical insolvency as a benchmark for the Thor proposal.

Richard Graham

Your company was previously auditors to BHS from 2001 to 2008. Is that correct?

David Clarke

I believe that is the case.

Richard Graham

And during that period, in every year that dividends were issued, they were significantly greater than the profits generated by the company. What do you think would have been the likely impact on the strength of the effective covenant with the pension scheme in that environment?

David Clarke

First, I am not an auditor; I have never been an auditor. I had no involvement with BHS at all prior to 2014, when I was appointed, so I cannot comment on the audit specifically. Companies are able to pay dividends from distributable reserves, if they have appropriate reserves and the board pass resolutions to decide to pay dividends.

Richard Graham

Let me put the question in a different way, then. The deficit had risen from £61 million to £274 million by 2011. What was your belief about the options available to the pension scheme and its members by the time you came in?

David Clarke

A fairly stark proposal had been put to the trustees. It said that if some form of restructuring of the BHS business could not be achieved, the group was suggesting that it would not be able to continue to provide support, as Mr Clare has outlined. The clear inference was that there would therefore be an insolvency, triggering the scheme’s entering the PPF. Project Thor was an initial proposal to try to deliver a higher level of benefits for members. One of the main drivers of that calculation is what the scheme would recover in a hypothetical insolvency. You have to pay more, so our aim was to try to get to the bottom of that and make sure we got the best deal for members within the Project Thor proposal package.

Richard Graham

A number of people have used the phrase, “We wanted to try to get a better deal for the pensioners and members of the scheme.” Is the definition of “a better deal” one that says, “The PPF would be able to provide 90% of the benefits. Therefore, if we can provide 91%, we’ve got a better deal to offer”? Is that what it boils down to?

David Clarke

That would be an interpretation. As I said—apologies if I am repeating myself—one of the main drivers of the funding that would be offered through Project Thor was this estimated outcome analysis. If by looking at it in an evidenced way we could demonstrate that we believe that the schemes would receive materially more than the group was suggesting, you wouldn’t be at 91%; you might get 100% or 102% of PPF benefits. Clearly, the higher that number, the better the return for members.

Richard Graham

And what was your estimate on the recovery plan and its credibility?

David Clarke

In terms of the recovery plan agreed on the back of the 2012 evaluation?

Richard Graham

Yes.

David Clarke

We have never formally reviewed that. I understand that it resulted in the payment of £10 million a year for 22.8 years. Throughout the time we were appointed, those payments had been made. Certainly during 2014, they were paid by virtue of support from the Arcadia group.

Richard Graham

So how complicated was your advice? If the PPF was going to pay out 90% and you could demonstrate that there was a corporate offer that was going to pay a little—or possibly quite a lot—more, you were going to say that that was a better deal.

David Clarke

Our aim and the purpose of our advice was to work out exactly what the schemes would get. If that number were higher, the proposal that the group would have to make to the schemes would also have to rise. One of the Pensions Regulators’—and, indeed, the PPF’s—hurdles in respect of these types of transactions is that the offer of support to the scheme must be materially more than the schemes would recover in insolvency.

Richard Graham

Yes. So you were part of these robust negotiations, were you?

David Clarke

I was.

Richard Graham

And what does “robust” mean? Did the corporate effectively say to you, “Well, look, we can do you a slightly better deal. Take it or leave it”?

David Clarke

That’s not how we conduct ourselves. Deloitte were instructed to prepare a baseline estimated outcome. We asked for details of that and the assumptions on the first day we were appointed. It is fair to say that we disagreed with it. We felt that the scheme would recover materially more. There were also areas where there was insufficient detail to enable us to conclude. We responded to the group and Deloitte with an extensive information request list explaining that we really need to get to the bottom of this. This was an absolutely fundamental proposal whereby, without wanting to sound emotive, 22,000 members of the pension scheme who were, in the main, fairly low paid with low levels of benefits were being asked to accept a reduction in their benefits again. It was something that we took extremely seriously, and the aim was to make it absolutely clear that whatever was being tabled was robust, with evidence, and gave the best possible outcome to members, in those circumstances.

Richard Graham

What did you achieve for the members by taking that stance?

David Clarke

The offer range from the group was increased as we went through those discussions. Piece by piece, various pieces of evidence—

Richard Graham

What did it increase from and to?

David Clarke

Well, the estimated outcome analysis was built on a number of assumptions, so you had individual pieces that would deliver certain value. As we went through the process, the group accepted that certain assumptions they had made in the first instance were perhaps inappropriate, and that element of the offer was increased—for instance, the value of the properties.

Richard Graham

On the value of the properties, are you aware that the Ealing store was apparently sold to Sir Philip Green’s stepson for £7 million very shortly before the sale of BHS, and subsequently sold by him for £10 million very shortly afterwards?

David Clarke

There were a number of property transactions that became clear around the sale and, indeed, after the sale, to fund the business. We were consistently asking for details of those property transactions in terms of which entities had held the properties, who they were sold to, how much they were sold for and what their value was. From day one, or from very early after our engagement, we were requesting from the group professional and independent valuations of the property portfolio so that any disposals could be benchmarked against a professional agent’s view.

Chair

Did you get answers?

David Clarke

During 2014, the group provided its analysis of property values, with which we engaged, but we consistently requested independent, third-party professional valuations, and they were obtained in early 2016.

Chair

Could we have copies?

Richard Graham

What was your underlying concern behind this? Was it that effectively asset-stripping was going on, which would then weaken the corporate and therefore weaken the value of the recovery plan, and that the 22,000 pensioners you have alluded to would, effectively, be stuffed that way?

David Clarke

Our initial concern was “Was an insolvency of BHS inevitable?”, which is one of the hurdles that the regulator and the PPF guidance sets out. If that wasn’t the case, there would be no need to compromise the scheme of benefits—you could continue to meet them.

Richard Graham

What was your advice to the trustees? Did you think it was inevitable?

David Clarke

The proposition put to us was that without continued group support, BHS would not be viable on a stand-alone basis. Based on the losses in recent years—both profit and loss account losses but also cash outflows, both historic and forecast—I was satisfied that, based on the information we had been provided, BHS was not viable without continued group support.

Richard Graham

Without continued group support. In your estimate and from what you knew of the finances of the group, could that support have been provided?

David Clarke

That is a matter for the Arcadia and Taveta group. What was clear from the years running up to our appointment was that BHS had been loss-making and that at that point in time the group had been willing to provide support. As for whether its circumstances had changed to an extent that it was no longer able to provide that support beyond 2014, I am afraid I have to direct you towards the directors of Taveta.

Richard Graham

Earlier, when I asked you whether you were aware that the dividends going out were greater than the profits, you said that you weren’t an auditor and that that was something for the corporate to decide on, but what you just said suggests that, actually, on behalf of the members of the pension scheme, you did not have complete confidence in the governance of the corporate.

David Clarke

If I may clarify, that is not what I said. I said that BHS had been loss-making for a number of years in the run-up to our appointment, and that the financial forecasts showed that it would continue to be loss-making and to absorb cash for a number of years, even if a turnaround plan could be successfully enacted. That meant that there were grave concerns about the ability of that business to continue to support the schemes.

Richard Graham

How would you feel if you were a member of that pension scheme?

David Clarke

As we sit here today, BHS is in administration, and the schemes are in a PPF assessment period. If the schemes end up in a PPF assessment period, members’ benefits will be reduced, and I am very cognisant that a lot of those members simply will not be able to afford reduced benefits. That said, the regulatory regime we have enables the regulator to judge or review and consider behaviour retrospectively. My understanding is that the Pensions Regulator has a live investigation open and running. Until that investigation is concluded and restitution, if any, is put in place, it is not quite clear where the schemes will end up and whether members will be at PPF level of benefits.

Richard Graham

What more could the trustees have done at the moment when it was decided to sell BHS to a completely unknown entity with an arguably disreputable background?

David Clarke

I am not going to comment on the background of the individuals, if that’s okay with you. In terms of the trustee actions, I think there is a fundamental point that may be helpful for me to explain. Trustees have no power of veto over corporate activity. They are not able to stop a transaction; they are not able to dictate to a corporate who it can or cannot sell assets or a business to. Certain pension schemes have various powers, such as a unilateral winding-up power where they could call in all the debt, triggering a fairly cataclysmic event. Had that been done, it would just have triggered BHS’s insolvency earlier. This scheme and these trustees do not have that power.

Mr Wright

Do you think they should have that power?

David Clarke

Had they had that power and exercised it, BHS would have entered administration in 2014 rather than 2016, so it wouldn’t have solved the issue. I am very clear—

Chair

How we look to the future is a crucial part of the next stage of our inquiry. Did any of you Google Mr Chappell to see anything about him?

David Clarke

When we were told of the buy-out, which at that point in time was listed as by Swiss Rock, we did use internet searches to try to establish something about Swiss Rock. We were also given the names of four or five individuals who would be involved in Swiss Rock, which we searched. We also searched Companies House—

Chair

Could you give us a list of those individuals, David?

David Clarke

I cannot recall all of them, but—

Chair

No, but could you submit it in writing?

David Clarke

Absolutely. If I may answer your question and finish my answer to the previous question, because the acquisition vehicles were new companies set up for the purpose of the acquisition, there was very little history on them. I also suggest to you that if you had carried out an internet search in respect of Mr Chappell in early 2015, you would have got a very different set of results than if you carried out an internet search in respect of Mr Chappell today. Regardless, I am very confident that the trustees and their adviser team did everything they could within the regulatory framework to ask questions of the seller and buyer to try to understand the situation. They also made very clear to both the seller and the buyer the scale of the pension obligations and the fact that we had sat through the previous year with Project Thor on the table demonstrating that BHS was unable to support its scheme, and it was made very clear that we did not consider a sale to any party would solve those problems.

Richard Graham

May I turn now to Deloitte running this? Can you confirm to us that you were providing pensions advice to BHS, Arcadia or Taveta, or all three of them? From when to when?

Tony Clare

We have never provided pensions advice to BHS Ltd. We have provided pensions advice to Taveta Investments Ltd since January 2014, and we have provided pensions advice to Arcadia Ltd since—I think I will need to come back and confirm this in writing, but I think it was agreed in February or March 2016.

Richard Graham

Thank you. And did your company have any other contracts with Taveta Investments, BHS or Arcadia, apart from pensions advice? Were you auditing anything, or consulting on anything?

Tony Clare

We provide a range of professional services. Certainly, we provided some restructuring advice on the options on insolvency to Taveta in respect of BHS, and I am sure that over the years we will have provided other professional services to those entities going back, but I will have to go and check to confirm exactly what services we have provided.

Richard Graham

And the chairman of both the Taveta companies was Lord Grabiner during that period when you were appointed.

Tony Clare

I believe that is correct, yes.

Richard Graham

Weren’t you the man providing that advice?

Tony Clare

To the directors overall, yes; not exclusively to the chairman.

Richard Graham

Yes, and what was your remit?

Tony Clare

We were instructed to review the pension arrangements of BHS Ltd.

Richard Graham

For the benefit of the shareholders of Taveta.

Tony Clare

On behalf of the shareholders of Taveta. Our instructions were: can we find a reconstruction of these pension schemes that will have the consent of the trustees so that we can provide a better outcome for the members than the alternative of going into the Pension Protection Fund, and to protect the Pension Protection Fund.

Richard Graham

To what extent is the Pension Protection Fund’s effective remit to provide 90% of the agreed accrued benefits to members a nice cop-out for corporates who want to walk away from pension scheme obligations?

Tony Clare

I don’t think it’s a nice cop-out for anybody to receive 90% of their pension expectation. From the instructions we were given, it was evident that the shareholders of BHS Ltd—the owners of BHS Ltd—clearly wanted to provide a better outcome than that of going into the Pension Protection Fund. They were seeking to solve the issue and it was going to be costly. They knew it was going to be costly, and they were still willing to pursue an option to try and deliver a better outcome for those members.

Richard Graham

So those—

Chair

May I just ask about the moral hazard? If I am boss and my pension scheme has only £100 million in it, but needs £300 million in it to prevent it going to the PPF, and if I only provide £200 million, it might still go into the PPF. It has cost my company a huge amount of money, but the pensioners, bless them, would still only get 90%.

Tony Clare

That would be correct.