Oral evidence: Pension Protection Fund and Pensions Regulator HC 55 Wednesday 25 May 2016

Oral evidence, 25 May 2016.

Witnesses

Chris Martin, Chair, BHS Pension Fund Trustees, Mike Lymath, BHS Pension Fund Trustee, Phil Kitchen, BHS Pension Fund Trustee, and Jason Hyde, BHS Pension Fund Trustee, gave evidence. Frank Field took the Chair.

Chair

May I ask you to identify yourselves for the sake of the record, starting with you, Jason? I have a general question to ask each of you and then we will be into the main part of the questioning.

Jason Hyde

My name is Jason Hyde. I used to work for BHS. I do not work for BHS any more.

Mike Lymath

I am Mike Lymath. I am a director of MGL Corporate Services Ltd, which is an independent trustee on the BHS scheme.

Chris Martin

I am Chris Martin. I am Managing Director of Independent Trustee Services and chair of the two BHS defined-benefit pension schemes.

Phil Kitchen

I am Phil Kitchen. I am a member-nominated trustee.

Chair

To begin with, starting with you, Jason—we are clearly interested in the roles of trustees—could you tell me how you came to be a trustee? When was it from and to, who appointed you, who approached you and so on?

Jason Hyde

I was a member-nominated trustee. I worked for the trustees for just under four years. I was a store manager of one of the stores, at Cribbs Causeway in Bristol, and I was approached because I had been for the role a few years ago and then the position became available again, so I put myself forward and was member-nominated. People had to vote for me to become part of the board.

Chair

Did you go on a training scheme before you became a trustee?

Jason Hyde

I did a training scheme just after I joined, and then there were a number of schemes that came up during that time as well—small meetings for me to go off to learn bits and pieces to do with the role. But my role was more a supporting role as I was learning more about what was expected.

Mike Lymath

I joined the trustee panel in April 2014. I was approached by the trustees because there was a vacancy for an independent trustee, and I joined at that time.

Chris Martin

It might help the Committee if I say a couple of words of background about this trustee board, which is slightly unusual in its composition. The board has to have two professional independent trustees and the third trustee is actually a corporate trustee, BHS Pension Trustees Ltd. Jason and Phil are directors of that corporate entity.

Chair

Chris, when you say professional trustees, what do you mean by “professional”?

Chris Martin

Professional trustees are trustees who practise and act as trustees across a number of different pension schemes in different situations. That is the composition of the board and its structure. We actually have three corporate trustees, of which—we are all respectively directors of different entities. I was first approached in May 2013 by one of the professional advisers to the two BHS pension schemes to see whether I would be interested in submitting my CV and attending for interview.

Chair

Could we ask who that was, Chris?

Chris Martin

It was one of the advisers from Towers Watson as was, and I was subsequently appointed chair of the trustees in January 2014.

Chair

We will come back to that in a moment.

Phil Kitchen

I was appointed in late 2010 as a member-nominated trustee. I had an interview with two members of the trustee board at that time—Arthur Walford and Ian Alkins—and I was subsequently appointed.

Chair

Chris, you were approached. You presumably did some due diligence yourself before you wanted to take on the job. What did you think you were taking on once you started to look at the state of the scheme and the companies and its ownership structure and so on?

Chris Martin

I did some background due diligence, which I would do ahead of any interview for a prospective appointment. The details of the 2012 valuation were not at that point in the public domain, because it was still in the process of being signed off. I could tell from a fairly high-level search of the available information that there was certainly some distress in relation to both the schemes and the sponsoring company.

Chair

Right. Anything more?

Chris Martin

Not particularly from that high-level search of information, no.

Chair

Given your portfolio of work, Chris, did this strike you as one of your more challenging pieces of work? How many schemes do you chair?

Chris Martin

I chair a small portfolio—sorry, I don’t chair all the appointments. I lead seven or eight schemes, which are ongoing schemes. There is no distress and they have strong covenants and are well funded. I then have a small number from time to time—two, three or four schemes that are in more challenged circumstances, such as the two BHS schemes. I believe the Committee may have seen my CV, so it probably has the background to some of those cases. So the fact that I was identified by Towers Watson as a possible candidate for chair did not surprise me, given that I had identified there was some stress in relation to the sponsor and the schemes.

Chair

May I ask Phil and Jason this? When Chris took over, did the temper of the meetings change; did the nature of the agendas change; did the subjects you were looking at change; and did some urgency about the survival of the scheme begin to feature or not?

Phil Kitchen

I would not say that it changed in that sense. I think the circumstances certainly changed and therefore our response to those circumstances required some urgency.

Chair

Such as?

Phil Kitchen

Clearly, in 2014, we had the restructuring opportunity through Thor, and as we went through 2014, with a business that seemed to be trading with more difficulty as time went on, those were the circumstances that really forced us into—

Chair

Jeremy will come in on Thor in a moment, but I want to ask about when you were meeting as trustees. You talked about the difficulties of—let’s call it for the moment the parent company. Was that information you gleaned from reading the papers, or did you actually have briefings as trustees that it was getting more dicey for BHS?

Phil Kitchen

We would have had an annual assessment of the business. Working with the business myself, I understood what the current performance was, because I could see that on a day-to-day basis.

Chair

You brought that knowledge in with you.

Phil Kitchen

Yes, I could provide that knowledge for the—

Chair

Jason, do you want to add anything?

Jason Hyde

I would say exactly the same as Phil. Because of working in stores and within the regional management team, I was aware of how the business was performing. Then, when we got the information and feedback from our advisers and support company, it all made sense as to where the business was up to at that point.

Chair

Richard, you asked on Monday about the portfolio of assets the company had and how one might manage the risk. Could you pick that up for us, please?

Richard Graham

Chris, may we start by clarifying a little bit your role as a professional trustee? This is a remunerated role, is it?

Chris Martin

It is, yes.

Richard Graham

Could you tell the Committee what you receive from your duty as chair?

Chair

And how many hours, please.

Chris Martin

I was first approached to be appointed on the basis of a fixed number of meetings per annum and I agreed a fee to cover those. It was four trustee meetings per annum. For reasons which I suspect we will come on to talk about in a moment with Project Thor, the four meetings per annum were soon overtaken by events. So I then moved on—or, sorry, my company moved on; it is my company that deals with this—to a per hour charge, for the work undertaken. I couldn’t tell you, but I can write to confirm to the Committee, the number of hours I have spent on BHS schemes in the last two years and five months since I was appointed. The total cost to date is in the region of £250,000.

Richard Graham

You have received around £250,000.

Chris Martin

My company has, yes.

Richard Graham

From the scheme, or from the corporate?

Chris Martin

We were paid by the scheme.

Richard Graham

And what would you describe as the main priorities of being chair of a pension scheme?

Chris Martin

Clearly, as trustees we have the interests of members as our central obligation. Protecting those interests is central to everything that as trustees we try to do. As chair, I take responsibility for leading the board, for trying to set its agenda and for being at the centre of some of the more challenging and difficult negotiations that were required.

Richard Graham

In terms of the responsibilities to the members, how high on your list of priorities would you put making sure that the assets were being managed successfully?

Chris Martin

That would be one of our primary objectives: to make sure that the investment strategy was very much aligned with the strength of the sponsoring covenant and also with the funding level of the scheme. The three elements come together.

Richard Graham

When you became chairman, what was your analysis both of the strength of the covenant and of the success of the investment strategy?

Chris Martin

Almost immediately after I became chairman, the Project Thor proposal was introduced, but in that short window between 1 January and 29 January, my initial views were that the level of investment risk being taken in the scheme perhaps was a little higher than I would have expected, given the implied strength of covenant.

Richard Graham

And it had proved disastrously unsuccessful over the previous six or seven years, would you say?

Chris Martin

I am not sure the investment strategy itself had proved disastrous. There had been difficulties around 2009, I believe—clearly these events predate my appointment—but then 2009 was a challenging time for most investment markets. The deficit had increased over that period quite significantly, but that was as much to do with the increase in the liabilities as it was to do with the asset performance.

Richard Graham

During that period, and in the lead-up to when you became chairman, was Towers Watson the adviser throughout that period?

Chris Martin

I believe that is correct, yes.

Richard Graham

But they were also responsible for effectively introducing you to the job as trustee, and then you became chairman.

Chris Martin

Their contact with me was an initial phone call to see if I would be interested and then, if I was interested in taking on the appointment, sending a CV to them. There was no further contact with Willis Towers Watson in relation to the appointment process.

Richard Graham

But none the less, their introduction was responsible for effectively generating £250,000 of revenue to your company.

Chris Martin

Willis Towers Watson were the people who contacted me and I believe contacted other candidates to take on this role.

Richard Graham

Did you consider a review of your investment strategy and your advisers, and did you have one?

Chris Martin

Again, the period between my appointment on 1 January and Project Thor being presented to the trustees was very short. I didn’t, in those 28 days, consider any formal review process. Once Project Thor was presented to the trustees, then we did go through a process of considering the appropriateness of our advisers for the challenges faced—

Chair

Richard, would you ask just one more question and then we’ll move on?

Richard Graham

So you thought that there was too much risk in the portfolio and that the deficit on the scheme had ballooned out, but did you actually trigger a review of your investment strategy and your advisers?

Chris Martin

I did not trigger that review in the limited period before Project Thor. Immediately that Project Thor was being considered by the trustees, we initiated that review.

Richard Graham

What would you say if someone suggested that there was a possible conflict of interest between your appointment on the recommendation of the adviser of the scheme, the quarter of a million pounds that your company had generated from that appointment, and not really looking into whether their investment advice had been successful in the period during which they were advising the scheme?

Chris Martin

Willis Towers Watson contacted my firm to see whether I would be interested in acting as chair, and I understand it also contacted a number of others. The incumbent trustee board then ran an interview and selection process, with which Willis Towers Watson had no involvement at all.

Richard Graham

How many people were on the trustee board?

Chris Martin

On the selection panel I sat in front of, or the entire board?

Richard Graham

On the selection panel.

Chris Martin

I was interviewed by the incumbent chair, Dr Downes, Arthur Walford, the other professional trustee at that time, and the secretary to the trustees.

Craig Mackinlay

This is a question to you all. During the period we are discussing, what was your working relationship? How much contact did you have with Sir Philip Green and Paul Budge? To what extent did you get involved with the regulator, which would have had an interest in what was going on in such a scheme?

Chris Martin

I will take that first, because in my role as chair I was front and centre in most of those discussions, so perhaps it would be easier for me to give an overview. Other than having an introductory meeting just before I assumed the role as chair, my initial contact with Paul Budge was at the point that Project Thor was put to the trustees. Through that same meeting I was introduced to Arcadia’s advisers, who had put together Project Thor. It is probably fair to say that as Project Thor was being developed over the following five to six months, most of the contact was between our respective professional advisers. There was limited contact between the trustee board and the company over that period. Personally, I had only very limited contact with Sir Philip Green in that period. There was more contact in advance of the sale of the business and in the subsequent period, but that was just because the parties were working much more closely together. After my appointment in January 2014, my initial contact with the Pensions Regulator was when in mid-January they sent us some questions on the actuarial valuation, which we answered in short order. We then had some follow-up questions in May 2014. The period of quite close working with the Pensions Regulator was initiated at the meeting on 7 July when Project Thor was discussed.

Craig Mackinlay

Okay, so from January onwards Project Thor was in its early phases.

Chris Martin

Absolutely, yes.

Craig Mackinlay

But it hadn’t really got to an advanced enough stage to be mentioned to the regulator until a bit later on. Do you think there was a case for mentioning it to the regulator at an earlier stage? Why wasn’t that done?

Chris Martin

Project Thor was presented to me as the chair of trustees on 29 January. I then shared it with our incumbent advisers and the trustee board.

Craig Mackinlay

That was Deloitte at the time, wasn’t it?

Chris Martin

No, Deloitte was advising Arcadia. I shared it with the trustee board on 6 February at a specially convened trustee meeting. One of the decisions coming out of that meeting was that the trustee board needed to make sure it had the right level of specialist advice. We already had Eversheds, who I believe the Committee met the other day, as our legal advisers. Central to the Project Thor proposition was a consensual, solvent restructuring of the business, alongside the pension scheme and other stakeholders as well. Because it had that restructuring aspect to it, we needed specialist accounting and covenant advice. At that point, the meeting decided to consider CVs from two specialist accounting firms and we decided to appoint KPMG to give that high-level advice. From that point onwards, a lot of the work around the covenant issues—the sponsor issues—were between KPMG and Deloitte reporting back to their respective clients.

Craig Mackinlay

Mr Hyde, you said you had some training during the early time after your appointment. Did you feel fairly aware of what the Pensions Regulator was there for: its powers and advice-giving? Did you feel quite comfortable with the amount of information you had been given?

Jason Hyde

Yes, I was comfortable with the information I was given. If I wasn’t, I would speak to my secretary or either of the chairmen to understand what else was required. Because I did the role unpaid, for me it was about taking training as and when I was able to because I had a store to run. I was involved as and when I was asked to be. I did not have as much involvement as everyone because I live in Bristol so I was unable to attend some meetings, but when I was there, I made sure I had feedback and the information I needed to enable me to carry out the role. Everything was explained to all of us very well so there were never any concerns.

Craig Mackinlay

Perhaps from someone else. What work did you do as a trustee board to consider Thor as the best available option? What sort of work did you do among yourselves? What sort of advice did you get about whether it was do-able or “the best we can do”?

Mike Lymath

When I joined in April 2014, Project Thor was on the table and for me it was certainly a key reason for joining because it was pretty clear that the pension scheme was in trouble. There needed to be a solution in the best interests of the members—hopefully, better than the alternative of PPF. Certainly when I joined, I looked at that carefully and, I think having spoken to Chris—I met Paul Budge at that time as part of my due diligence to understand the company’s point of view—concluded that Project Thor was a viable proposition and in fact in many ways gave the members benefits equivalent to those they would have got normally. Other than the inflation-linked increases, they would pretty much come out whole. It looked very do-able, so on that basis it was a good thing and the right thing to follow up.

Chair

Chris, what was the date when you first learned about the recovery plan for the pensioners?

Chris Martin

Project Thor? I was asked to attend a meeting on 29 January 2014.

Chair

Right, and when did you first tell the regulator?

Chris Martin

About Project Thor? The middle to late part of June when we had done much of the work that Mike just talked about. So when I first received the presentation on Project Thor, it was a slide pack which clearly quite a lot of work had gone into because quite a lot of analysis had been prepared by Deloitte.

Chair

Sure, so it was June.

Chris Martin

Yes.

Chair

Had you had any correspondence, any phone calls, any emails or anything from the regulator once you took up as chairman that they were worried about the scheme?

Chris Martin

We had the email in the middle of January asking questions about the 2012 valuation and recovery plan that had been submitted the September before. They were asking questions predominantly around the investment strategy that was being adopted and the extent to which the trustees had considered the covenant of the sponsoring employer and asked for some documentary evidence around the steps the trustees had taken. That was provided. We then had a follow-up email from the Pensions Regulator in May again asking further questions. Information again was provided. In parallel with those two email exchanges, we were obviously working on analysing the Project Thor proposal with KPMG, with Eversheds, to see whether it was something from the trustees’ perspective that would give a better outcome to members than insolvency of the company.

Craig Mackinlay

Where was the brainchild of Thor? When did that first start on the table? It was obviously before your time.

Chris Martin

Before my time, yes. That was a proposition put together by the advisers to Arcadia. I don’t know when it was proposed formally, but the slide presentation I mentioned, at the meeting on 29 January, was quite well developed, so there clearly had been some time and effort spent on getting it to that stage. I would have thought it had taken some months to get to that point.

Chair

Before I go to Michelle, when you were being—Richard got you explaining that there was a formal way you were approached. So that we try to understand the power structure within this whole organisation, before you became chairman did you meet Mr Budge or Sir Philip? Did they smell you out—whether you were going to be the proper guy for this—or did you only meet them afterwards?

Chris Martin

I went through an interview process, initially with the incumbent two professional trustees. I then attended a briefing meeting with the secretary of the trustees, to give me more factual background. I was then invited to meet Sir Philip and Paul Budge, on the basis that I was either the preferred candidate or one of two preferred candidates.

Chair

Were they together when they met you?

Chris Martin

They were.

Chair

How long did you spend with them?

Chris Martin

It was a very brief meeting: less than 15 minutes.

Jeremy Quin

May I come back on that point, Chris? You were coming into a scheme with a 23-year recovery plan. I know you have a lot of experience in the sector. That must have struck you as a recovery plan of extraordinary length and, as you have said, you knew it was in a distressed situation. As you would have been aware from the BHS accounts, they were placing some reliance on the wider group for a going concern basis. I am curious about the amount of time you spent. It was quite a brief meeting with Philip and Paul Budge, but did you try to assure yourself about the ongoing support for BHS from the top co? There would still have been a pension fund there to manage, I appreciate that, but what was your thought process?

Chris Martin

The interview process had been with the two professional trustees. The context that I gave earlier about the composition of the trustee board is important. There are three trustees and two must be professionals independent of the business at all times. The power to remove and appoint those two independent professionals is vested in the trustees; it is quite an unusual structure for a trustee board. The sponsoring employer cannot decide to appoint or remove trustees, so my meeting with Paul Budge and Sir Philip Green was a courtesy meeting and not a meeting for them to decide whether I could be appointed. That power was with the trustees, and as far as I was concerned they had already concluded that I was either the candidate they wanted to appoint, or one of two.

Jeremy Quin

It was not for them to appoint you; I appreciate that. This is not a negative remark, almost to the contrary, but you were prepared to take on the role without receiving assurances as to the longevity of the support that the group would be giving to BHS—it is clear from the BHS accounts that you would be in trouble without it.

Chris Martin

Yes, we did not discuss the degree of Arcadia support or the longevity of that support in that meeting. It was a brief introductory meeting.

Jeremy Quin

That is very clear; thank you. You could not have been happy with a 23-year recovery plan. Were you working through ideas that you could take back to BHS and, through them, to the group, as to how that period of time could be shortened?

Chris Martin

Again, I was appointed on 1 January 2014 and Project Thor was launched to the trustees on 29 January, so there was a very short window. I did not actually get to chair a trustee board meeting in that period—we did not convene—so I did not have an opportunity to formulate those plans before Project Thor was put in front of us. Had I started to have that thought process, I would very much have focused on the available cash to support the recovery plan. I had had access, by that time, to the covenant report that the previous trustee board had received. That covenant report made it very clear that the BHS entity, the legal entity that was the sponsoring employer of the two schemes, could not support the schemes without Arcadia’s intercompany support—hence the amount of free cash available to fund the schemes was determined by that support, and its willingness to carry on supporting.

Jeremy Quin

Had Thor not been forthcoming—I just wonder, Chris, because you have been in many situations—what would you have done? I ask because, clearly, you have got the covenant report. Would you have spoken to the regulator? Would that have been part of your process to try to secure a better deal for the pensioners, other than 23 years? What would you have done under normal—other—circumstances?

Chris Martin

As professional trustees, our priority is absolutely the protection of members’ benefits and so our focus would be on that. Engagement with the regulator would have happened here as a matter of course, because they were already looking at the 2012 valuation and had it engaged with us. Project Thor then overtook that engagement, but I am fairly confident that one of the first steps we would have taken with our normal engagement with the regulator would be to think about what steps we could take to get a stronger long-term commitment to the covenant and/or take some of the risk out of the investment strategy, because the two of those elements sit side by side and getting that balance right is absolutely key to trying to deliver a better outcome for members.

Jeremy Quin

Yes, but you didn’t need to go down that route because Thor was put on the table by the end of January. What did you believe was the genesis of Thor? What was the driver of the proposition that was put to the pension trustees?

Chris Martin

The position was very clearly put to the pension trustees that Arcadia Group had built up a very significant intercompany debt in supporting BHS—several years of poor trading and losses had given rise to that intercompany debt—and that Arcadia Group was no longer willing to support BHS, which of course is the only entity that we as trustees had a legal recourse to, unless there was a consensual, solvent restructuring of the group and of the pension obligations, and that would require the four main stakeholders to share in that restructuring.

Jeremy Quin

You have made the point that the advisers went through the process of determining how Project Thor would work and the impact on pensioners—is that the process? What was the process you went through to ensure that pensioner benefits were protected in the advent of Thor?

Chris Martin

We received the Project Thor proposal. We appointed KPMG as our specialist covenant advisers. We engaged with our scheme actuaries and our legal advisers, Eversheds, to analyse some of the thinking behind Project Thor. The proposal put to us was quite well developed and quite a lot of actuarial work had gone into it, particularly around the outcomes for members, from paying wind-up lump sums and what the residual schemes’ solvency level and strength would be. So we were looking at all the different aspects of Project Thor and it took us four months to analyse those to a point where we were confident, as a board of trustees, that Thor would deliver a better outcome to members than inevitable insolvency, which was the alternative.

Jeremy Quin

Did it occur to you, at any stage in that, that it might have been helpful to go to the regulator, to have them as a friend on-side, to have them in a supportive capacity? Or is it more, “We finalise our plans, we have our plans, we go to the regulator with a finished entity and get their blessing”? What is the relationship with the regulator?

Chris Martin

Developing and exploring what was behind Project Thor was more important to us at that point, to test whether it was something the trustees could support to deliver better outcomes to members. It took us several months to do that; Thor is quite a complex proposition. Having got to the point where the trustees were going to support it and say that it was going to deliver the best outcome, we then engaged with the regulator.

Jeremy Quin

How was it communicated to you, then? You finally went through, you did all the work and were happy it could proceed; that was in the interests of the pensioner benefits. How were you then told that it had collapsed and it wasn’t going to proceed?

Chris Martin

We engaged with the regulator in early July, at the regulator’s request, and at that point the regulator had seen a briefing pack on Project Thor and some of the sponsor covenant analysis, which is referred to as the EOS—the estimated outcome statement—on Project Thor. We had an initial conversation with the regulator and we talked them through our understanding of Thor and through the work we had done to test Thor—

Jeremy Quin

And at that stage it was a draft proposal that went into the regulator, was it not, on Thor? It was a draft letter for approval, rather than a final—?

Chris Martin

Yes, it was a draft clearance application put in, I think, slightly after that first call, but it was submitted by Arcadia Group. Clearance is a sponsor activity; it is not a trustee activity. Trustees can’t benefit from clearance, but it was not unusual to put it in draft. Thor itself was a well-developed concept but there were still elements of it that needed to be finalised, including at that stage the estimated outcome number, which was a key component in terms of the cash that we paid into the scheme.

Jeremy Quin

How was the relationship with the regulator through that? Was it helpful and productive? They asked you for information, but they weren’t getting the information. Was that simply because it wasn’t there? They never used section 72 powers. What was the nature of the relationship with the regulator at that point?

Chris Martin

That particular period of regulator dialogue spanned approximately two months from the beginning of July to the beginning of September. We had a number of calls between the trustee board, its advisers and the regulator. Where the regulator asked us for information, we endeavoured to supply it. Where the information was available to us, we supplied it straightaway. In other instances there was information that they wanted the trustees to gather on their behalf, so that they could consider Project Thor. Some of the information they were asking for was not necessarily that surprising because part of Project Thor involved something called a regulated apportionment arrangement, where the regulator has particular obligations to consider issues in relation to past transactions. The information wasn’t entirely surprising. We were trying to gather it on behalf of the Pensions Regulator, and in parallel to our discussions—the trustee, adviser and TPR discussions—I believe there were also discussions between Arcadia Group and TPR. All the parties were working together to try to provide that information.

Jeremy Quin

That is what I am trying to get to. In your view, as an experienced trustee, were all parties working together? You could ask whether this was just the sponsor trying to bounce the regulator into something, and you could say that the regulator was being very slow and should have been using section 72 powers to gather information swiftly. From your perspective, were all parties working constructively together at that stage to try to get to the right outcome on Project Thor?

Chris Martin

In the two months from the beginning of July to the beginning of September there was what I would describe as an intense period of activity. Everyone was working very quickly to consider and analyse Thor and to gather the additional information that was required to properly analyse it. Our advisers, in the backdrop to those aspects of Thor, were trying to put together legal documents to give effect to it, had it progressed at that time.

Jeremy Quin

It must have come as a bombshell in September when you were told that the whole thing was off.

Chris Martin

From the point at which the trustees first considered Thor and thought that it represented a better outcome for our members than PPF, we had been working to deliver it. It was very, very disappointing when we first heard that it was going to be paused.

Jeremy Quin

How was that communicated, and what was the reason given?

Chris Martin

The communication to the trustees and our advisers was by way of a conference call on 5 September with Arcadia and its advisers, in which they communicated the decision to put Project Thor on hold—I think “pause” was the word that was used—until after the Christmas trading period.

Jeremy Quin

Was a reason given?

Chris Martin

They wanted to carry out a full strategic review, with all options available, after the Christmas trading period.

Jeremy Quin

Okay, so it wasn’t that they were saying, “We really want to do this, and we are committed to doing this, but right now it is quite difficult because we would be having to go to our landlords at a peak time in the run-up to Christmas, or we would be talking to our suppliers about cutting margins at a difficult moment,” but just that they were doing a strategic review and wanted to have a look at the outcome of that?

Chris Martin

At a high level it was presented to the trustees as a strategic review. The timing in relation to landlords and suppliers was part of that discussion, but it was more presented to us as, “This is on pause. We want to consider our options, and we’ll come back in the new year.”

Jeremy Quin

What was your gut instinct? Was it that this was going away and wasn’t going to come back because they had other irons in the fire? Or was it that you would be back engaged in five months’ time and that all would be well?

Chris Martin

Our understanding was that we would be back engaged. It was a strategic review, with all options being considered. As part of that conversation, having told the trustees that Arcadia would no longer support BHS if it was not restructured—this was a point I had to make quite clearly to Arcadia—it was very difficult for the trustees to then place any reliance on future support. As a consequence, we had to behave as though we had no covenant—BHS itself could never support the scheme on its own. A consequence of reaching that conclusion was that the trustees then initiated a significant de-risking of the scheme’s investment strategy. That was the point at which, with no prospect of Thor being transacted quickly, we then de-risked the investments.

Jeremy Quin

“Strategic review” is two ominous words. It often means closure or sale. Did you consider going even further? I know you would not necessarily have acted to the contrary of the pensioners’ benefits, but you must have considered, “Where are we going to end up with this? Is BHS going to go? Should we be taking even more stringent action?” Did you consider anything beyond de-risking the portfolio?

Chris Martin

The conversation we had with the company around its strategic review was clear that all options were available. I am sure that my colleagues who worked in the business picked up speculation from time to time. The key power available to the trustee was to deal with the investment strategy and to de-risk. Our other powers are very limited in those circumstances. By de-risking, we were putting the scheme in a better place to deal with whatever the outcome of the strategic review was, without closing off any options. As part of the de-risking, while we significantly reduced our growth asset exposure and hence took risk out of the strategy, we also effected some equity options effectively to pay a premium to keep open the upside from equity performance in case Thor did come back on the table.

Jeremy Quin

Chris, thank you. One last thing on Thor: is there anything that the regulator and yourselves could have done to have kept this on the table and to have made it work at that stage?

Chris Martin

Sorry?

Jeremy Quin

At that stage in September when the whole thing was pulled, was there anything that you or the regulators could have done to have got Thor executed and over the line and to have got that result, which would have been better for the PPF and better—

Chris Martin

The July to September period was when Thor was being considered. We were asking questions of the company. The regulator was asking questions of us. Those were all the sorts of questions and answers that would normally have to be dealt with as part of a regulated apportionment arrangement. There was nothing unusual in that period.

Jeremy Quin

There was nothing further that the regulator or yourselves could have done to make this work.

Chris Martin

Arcadia reached its conclusion based on discussions it had had with the regulator.

Amanda Solloway

You mentioned that there were several months when you were discussing Project Thor. How did you increase your intensity as a board of trustees in order to quicken that process?

Chris Martin

From the point at which we engaged together as a board of trustees on 6 February and appointed our specialist covenant advisers and engaged with Eversheds in terms of some of the legal aspects of Thor, we met more frequently. We had conference calls on a regular basis. We were exchanging email updates via the scheme secretary on a very regular basis. It was a period of very intense activity for the trustees.

Richard Graham

Chris, in July 2014 the Pensions Regulator got a call from the trustees about Project Thor. Later the same month, it also got an application for clearance for a regulated apportionment arrangement—that is, looking for potential entry into the PPF. Presumably you were involved in the first of those, but the second one was done by the corporate, was it?

Chris Martin

It might help the Committee if I spend one minute explaining Project Thor, because it hopefully answers that question.

Chair

No, just deal with this question.

Richard Graham

Given the time, could you just be precise and simple?

Chris Martin

Part of Project Thor was that members who did not consent to taking a wind-up lump sum or to transferring to the new scheme would enter the PPF.

Richard Graham

So that application came from the trustees or from the court?

Chris Martin

No, the application for clearance would have come from the sponsoring employer.

Richard Graham

Perhaps you did not know what corporate was talking separately to the Pensions Regulator about, but did it occur to you during that time that the corporate might be pursuing Project Thor with the trustees, but also pursuing a dual-track strategy, which might mean that at some point it wanted to drop Project Thor and simply pursue the PPF option? To what extent did you have confidence and trust in what the corporate was telling you?

Chris Martin

At the initial meeting I had on 29 January, when Project Thor was presented to me, and in subsequent discussions with our advisers, we tested the point about whether other options were being considered. While no specific planning for a corporate insolvency event was being carried out, we were made aware that those options had been considered as part of the estimated outcome work, so as trustees, we were aware that Arcadia recognised that that might be a consequence of withdrawing support, but we had no evidence in front of us that that was a twin-track approach with Project Thor.

Richard Graham

When Project Thor was removed, may I ask you all whether at that stage, in a word, you lost confidence in the corporate support for the pension scheme?

Chris Martin

At the time Project Thor was put on pause, I became very concerned about the corporate support for the scheme, given the message that had been delivered earlier in the process.

Phil Kitchen

Yes.

Richard Graham

Phil said yes; Mike?

Mike Lymath

Without doubt yes, because it sent a message.

Richard Fuller

May I ask each of you on what day and how you learned about the pending sale of BHS to Retail Acquisitions, or Swiss Rock?

Jason Hyde

I personally cannot remember the actual date—

Richard Fuller

And how?

Jason Hyde

Through conversations with Chris and the rest of the trustees.

Mike Lymath

I cannot remember the date precisely, but I believe that we had a conference call with Chris, and he explained what was going on.

Chris Martin

A sale was first mentioned in the press. The trustees were then asked to sign non-disclosure agreements. The first time that Swiss Rock was mentioned to me was in a conference call on 2 February.

Phil Kitchen

Yes, apart from the press, which was speculative, I would say early February.

Richard Fuller

So about 2 February, and the sale was concluded on 11 March, I think.

Chris Martin

Yes, that’s right.

Richard Fuller

So just about five weeks. What inquiries did you undertake to look at the capacity of the acquirer? As a set of trustees, did you agree a process to evaluate the acquirer who was potentially taking on the obligations? Or did you do it individually?

Chris Martin

Yes. If people are happy for me to answer, we signed the non-disclosure agreements, which allowed some initial details to be shared with the trustees. I had a subsequent briefing meeting with Paul Budge and Deloitte, advising the company, and their short list of potential acquirers had reduced to Swiss Rock being the preferred likely acquirer. That was on 9 February. I was then introduced to three members of the Swiss Rock acquisition team at a meeting on 19 February. We engaged KPMG very rapidly; our priority was to understand what impact the acquisition might have on the covenant that supports the scheme, and hence on the outcome for members. We engaged KPMG to start some work assessing what the covenant might look like at that point, so that post-acquisition, it could assess whether the covenant had been weakened as a result of the sale.

Richard Fuller

In your due diligence, did you think that your responsibilities to assess the acquirer were fulfilled by hiring KPMG to look at the covenant?

Chris Martin

Our priority as trustees is very much to understand and assess the impact on the covenant for the sponsoring employer. It is that covenant that the members rely on for the funding of the scheme, so that was our point of focus.

Richard Fuller

What sort of points would KPMG have looked at? Would those have been financial issues only? Would they have looked at the background and experience of the acquirer, or their credibility?

Chris Martin

KPMG’s analysis was focused very much on the impact on the strength of the covenant—the financial impact of the acquisition.

Richard Fuller

So, from the point of view of trustees, there was no requirement for you to look at the calibre of the new acquiring team?

Chris Martin

As trustees, we do not have a power to veto an acquisition or a sale process.

Chair

You could make a comment, though, couldn’t you?

Chris Martin

We were in regular engagement with the Pensions Regulator throughout that period. We were sharing the work we were doing and the questions we were asking; in particular, we were seeking assurance from the Swiss Rock acquisition team that they had sufficient working capital lined up to continue trading the business. So I think we were in open dialogue, sharing our concerns and our thoughts with the Pensions Regulator.

Chair

Sorry, Richard.

Richard Fuller

No, I think that is very useful, from our point of view. Obviously the financial analysis produced something, but the best projections do not say that the financial team may not be particularly competent in doing it; they may decide to veer off, they may be irrational. Mr Martin, I think you met with three of the directors of the acquiring company, didn’t you? Did you make any assessment of their capabilities? Did they pass your sniff test as the right sort of people to run this company?

Chris Martin

I had a brief meeting with three of the directors of Swiss Rock on 19 February. They introduced themselves and gave a very high-level overview of their professional backgrounds. I spent some time talking to them about the working capital point, which was critical to the trustees’ view on whether it was viable for the business to carry on trading on the other side. I asked them about their plans for the business; they talked to me about how the business already had a turnaround plan, which had been put together relatively recently, and they were going to trust the incumbent management to deliver that. They talked about hiring in a senior retail figure to lead the business. We then had a discussion on the pension scheme as well—perhaps the meeting was dominated by that. At that point, they had not done much due diligence on the pensions issues. I told them about the scale of the pensions challenge, and the meeting concluded with a recognition from the Swiss Rock team that the pension scheme would need to be addressed, in the same way as Thor had recognised the pension scheme would need to be addressed, and that we would carry on discussing what proposals could be implemented for that.

Richard Fuller

The company was sold three weeks from that date. Looking back now, do you think that when they met you, they were ready to buy the company three weeks later?

Chris Martin

After that meeting, we sought written assurances that, from a financial perspective, they were ready to take on the business, and in particular that they had sufficient working capital to trade the business. That assurance was provided.

Richard Fuller

Just to be clear, may I ask your colleagues? Did you meet with the management team of Swiss Rock prior to their acquiring the business?

Phil Kitchen

No.

Mike Lymath

No.

Jason Hyde

No.

Richard Fuller

So your judgment on them as credible buyers was essentially from the analysis that KPMG would have provided, but you had not met them. You would not have known them from Adam.

Jason Hyde

I met them from store visits—they had actually been to my shop before they bought the business—but I had not physically met them.

Richard Fuller

Did any of you conduct any due diligence searches or executive searches to check on their credibility and credentials?

Phil Kitchen

I did a Swiss Rock search, which came up with very little.

Richard Fuller

Subsequently, of course, Swiss Rock and Retail Acquisitions became the owners of British Home Stores, and I think for a period of time both Mr Chappell and Mr Henningson became trustees and then they left. Could you explain to the Committee what happened there?

Chris Martin

Our understanding is that when Retail Acquisitions acquired the BHS group, they changed the directorships across all group companies. The company that Jason and Phil represent is BHS Pension Trustees Ltd, which happens to be a group company, so when that change was put through, the directorships filtered through. As soon as we became aware of it, we spoke to RAL or BHS and they removed the two of them as directors.

Richard Fuller

Did you speak to them because they shouldn’t do that, or—

Chris Martin

Absolutely; it was totally inappropriate to have them on the trustee board.

Richard Fuller

So it was just a clerical error, was it, on their part?

Chris Martin

It was a clerical error. It was a Companies House filing issue, I think, where they filed on all the companies at once, and this happens to be one of the group companies.

Richard Fuller

What is your assessment, gentlemen, of Retail Acquisitions, and your relationship with them since they acquired the business, regarding their responsibilities to the pension funds? Are they regular inquirers? Do they show keen interest? Do they care about the employees and the pensioners?

Phil Kitchen

Yes. I would say that the money that we required on a monthly basis was paid. In other words, the financial requirement was delivered into the pension scheme. I think the only issue we had was with the delay in levy towards the end of the year, but as far as engagement was concerned, you will understand that once we were taken over, we were then in a situation where we were into a further review, which turned out to be Project Vera. That was another proposal, very similar to Thor. But in terms of the relationship—

Mike Lymath

I have little to add. I have not had much to do with RAL, but it was business as usual so far as the trustees were concerned in pursuing the best outcomes we could for the members, including in what became Project Vera.

Michelle Thomson

Just to pick up on a point that Richard made and so I am clear for the record, given what you have clearly described about your accountabilities as trustees, am I correct in quoting back, Chris, that they had not done much due diligence in the meeting you had with them on 19 February, and there was then a completed purchase date of 11 March, with a £20-million-a-year pension liability?

Chris Martin

To clarify what I said—apologies if I did not say it correctly the first time—they had not done much pensions due diligence at that point. I think they were doing other due diligence around the business, but at that point they had not done much pensions due diligence.

Michelle Thomson

I do not know if that makes things any better, to be honest, because it was still a 20—

Chris Martin

I just wanted to be clear in my answer.

Michelle Thomson

Okay; thank you. To probe a little more, if all four of you were to pick three adjectives to describe your impressions of what you met, albeit briefly, from RAL, what three adjectives would you pick? Confidence? Lack of confidence? Fear? Apprehension? What would they be?

Jason Hyde

I have probably met them on a different level from everyone else. I met them on store visits. They were professional, they were courteous and they were aware of how the business was performing.

Mike Lymath

I did not meet them directly, so my issues would be about concern that the pension scheme would be in at least as good a shape as it had been before, and that concern remained with me.

Chris Martin

They presented themselves as confident. There was clearly some uncertainty around the pensions issues. Those would be my two takes on it.

Phil Kitchen

I never met them prior to the sale, so the only thing I would say is the concern about the pension and support for the pension. That would be my only position.

Michelle Thomson

So if concern and apprehension were in place, was there anything further that you did after the meeting on 19 February where you expressed the £20 million per year pensions liability—particularly you, Chris?

Chris Martin

After that meeting we wrote to Arcadia’s advisers, who were between us and the Retail Acquisitions and Swiss Rock team at that time, asking for confirmation on their funding, and also, importantly, how that funding was going to be secured; because that then goes to the heart of whether the covenant and business would be impacted by the acquisition. So that was our key priority and our key focus—understanding that impact on the convenants. We shared that information with the regulator; we engaged openly with the regulator; and the regulator was supportive in the work we were doing.

Michelle Thomson

In terms of sponsor representatives on the board, once Dominic Chappell and Lennart Henningson had moved on, am I correct that there was no sponsor representation on the board after they had moved on?

Chris Martin

That’s right. It was agreed in discussion between our lawyers, Eversheds, and Olswang, who were representing RAL and the business, that it would not be appropriate, given that the pension scheme was still a very significant issue for the business, and hence there was going to need to be some negotiation—it wouldn’t be appropriate to put senior management on the trustee board.

Jeremy Quin

Lessons we can learn for other circumstances: in response to Richard’s questions—indeed, we heard it from KPMG yesterday—you went in with a series of questions to the would-be inquirers as to their financial going concern basis, how much working capital they would have and how long the business would be sustainable. You wanted reassurance on that point. Had they come back and said, “Actually, we’ve only got six months’ working capital,” and clarified, there’s nothing you could actually do in those circumstances, is there? Is there anything you could have done? If the answer that had come back was completely unsatisfactory and the covenant was going to be weakened—you hadn’t confidence that they would last more than six months as a going concern—is there anything, as trustees, that you could have done to stop or slow the transaction?

Chris Martin

As trustees, we did not have the power to veto that transaction.

Jeremy Quin

Is there anything you could have done to slow it, maybe involving the regulator, to try and ensure further time and effort were spent on the pensions?

Chris Martin

Throughout that period we were engaged with the regulator, sharing all the information we had, culminating in the 4 March meeting, which I think the Committee has heard about, where the regulator attended. It would be a question for the regulator whether it had any additional powers it could have used; but this was a set of circumstances where pre-clearance was not being sought.

Jeremy Quin

Yes; so they would have been required to sign off on Project Thor. The regulator are not required to sign off on this acquisition. Therefore, from your perspective, you didn’t have powers to stop it; and as far as you are aware the regulator didn’t have powers to stop the transaction, but they could say, “We’re going to look back on past events, anti-avoidance”—along those lines.

Chris Martin

The regulator has a wide range of powers. It has one other power, which is to trigger a winding up of the scheme. As far as I am aware, it uses it very rarely, if ever. Had it triggered a winding up of the scheme, the members would have fallen into the PPF immediately, so whether it would have been a sensible—

Jeremy Quin

You mentioned that post the acquisition you went immediately into son of Thor, the new project: Project—

Chris Martin

Project Vera.

Jeremy Quin

Thank you very much. So you went straight into that new project. Was that a requirement in any way? Was that part of an undertaking given by the acquirers to the vendors, or was it something the trustees had asked for? Did you manage to get an undertaking that they would look to a reshaping of the scheme as part of the deal?

Chris Martin

As part of our limited discussions pre-sale, both parties had recognised the need to deal with the pension scheme and to restructure the pension scheme liabilities, in the same way as it was recognised as part of Thor. So Project Vera was spun out of those discussions. The initial Project Vera proposal was put to us in July 2015, but then took some months after that to develop into something that was fully formed, although when it did it looked very similar to Project Thor.

Chair

The last question is to you, Chris. You have been explaining to us the formal legal structures through which power can be exercised, and your role in the pension scheme fitting within that. May I take you back to the—almost the apostolic blessing that you got from Sir Philip and Mr Budge. When you were with them—despite what the law says or what our powers are, and all the other things that you have really helpfully explained to us today—did you get the sense that when push came to shove, the two people who would decide the fate of the pension scheme were those you were meeting, at that meeting with Sir Philip and Mr Budge?

Chris Martin

We did not discuss the future of the pension scheme.

Chair

No, but did you feel that nothing would go through without those two approving?

Chris Martin

My understanding prior to the meeting, in the briefings I had had, and also from that meeting, was that both would be central decision makers.

Chair

Thank you very much, all of you, for your time. Examination of Witnesses

Witnesses

Dr Margaret Downes, former Chair, BHS Pension Fund former Trustees, Siobhan Forey, former BHS Pension Fund Trustee, and Richard de Dombal, former BHS Pension Fund Trustee, gave evidence.

Chair

Margaret, might you introduce yourself? I will ask Siobhan and Richard to do the same and then we will begin our questioning.

Dr Margaret Downes

I am Margaret Downes. I was chairman of the two BHS pension funds from the beginning—from 2000—until I retired in 2013.

Siobhan Forey

Good morning. I am Siobhan Forey. I was a company-appointed trustee and I covered the period from November 2009 to March 2015.

Chair

Both schemes?

Siobhan Forey

Yes.

Richard de Dombal

I am Richard de Dombal. I am also a company-nominated trustee. I was on the board between 1 January 2012 and 11 March 2015.

Chair

Margaret, might you begin by telling us, when you were appointed, where the appointment came from?

Dr Margaret Downes

I had previously been on the board of Storehouse and one of the subsidiaries of Storehouse was BHS. I had been appointed to the pension funds, not as chairman, but I was a member of the board for a few years before BHS was sold and then I continued into that.

Chair

Who approached you to be chairman?

Dr Margaret Downes

I am just trying to think. I perhaps was chairman—I beg your pardon—before 2000 and then I continued as chairman. I think I was probably chairman—yes, that’s correct; I hadn’t given any thought to that—for a couple of years before 2000 and so I came through as chairman.

Chair

Margaret, when you became a trustee, but then particularly as chairman, what did you see as your main duties?

Dr Margaret Downes

My fundamental main duty was to look after the interests of all the members of the pension funds and to lead the group of trustees who were part of my team.

Chair

To what objective, though, Margaret?

Dr Margaret Downes

I beg your pardon?

Chair

You said you were leading them, but what was your objective as chairman and as trustees?

Dr Margaret Downes

The objective was to get the best possible deal, always, for our members—to care for our members. We were always concerned about looking after our members. That would be our objective, and, through caring for them, to see we had a robust investment strategy in place and a clear assessment of what the liabilities were.

Chair

Siobhan and Richard, you were both employed as trustees. How did you settle this—as all of us as MPs would see it, because we have it ourselves—conflict of interest? How do you in these meetings put your duty as trustee maybe above your duty as an employee?

Siobhan Forey

Conflicts are managed quite proactively. Ahead of any agenda that is given for any meeting—conflicts are the first thing that is tabled at the beginning of any meeting, so you are expected to declare a conflict. We get training on conflicts through Eversheds, our legal advisers. You are just very clear, as a trustee, on how to separate that role from your employment role.

Chair

Margaret said that her main duty, quite properly, was to get the best possible deal for the pensioners, but you are an employee and you know what is happening to the company. Doesn’t that act as a restraint on you? If Margaret gets her way and gets the best possible deal, there might not be any company.

Siobhan Forey

No, because ultimately you are striving to secure the best deal for your members. You are ultimately, as a trustee, absolutely expected to protect your members’ interests. The company relations have to be positive; they have to be constructive; they have to be professional. And you are expected to take part in that dialogue.

Chair

If you were helping us to devise what we should move to—a different scheme—do you think one ought to eliminate this conflict of interest from pension trustee boards?

Siobhan Forey

No, I think pension trustee boards benefit from having company-nominated members on their scheme, because you can bring something different from what the independents can bring.

Richard de Dombal

Definitely there is an element—when we are in those meetings, we have a pension trustee hat on and we act in those interests in exactly the same way as Dr Margaret here. We act in the interests of the members of the trustee fund. However, we do have that interlink into the company and we can provide information that is not confidential and not conflicting. As Siobhan said, we are trained in these matters, and we provide that information that allows Dr Margaret and other independents to understand a little bit more about, say, the culture in the company or some of the people who are involved in the company—that sort of thing. When there is a conflict situation, which for example in my case was around Project Thor and things, we take action. As Siobhan said, it is proactively looked at in advance, because these things are very difficult. I agree with you, Mr Field, that it’s a tightrope you have to walk, but we take it very seriously.

Chair

We will come on to that in a moment, Richard. How many hours a year do you think you put into your stewardship of the pension scheme?

Richard de Dombal

That would depend very much on what is going on. If it is—

Chair

Just give us a flavour.

Richard de Dombal

There are maybe six to eight meetings of the BHS pension trustee board and its various committees a year—in a typical year. For example, there are two sub-committees. There is an accounts committee that signs off the accounts for the three years involving myself and Dr Downes. There is an investment committee that meets on a regular basis about the investment strategy. So there are maybe six to eight normally. The meetings are for half a day on average, and there is preparation for those meetings. I have not really done the maths, but it’s whatever that works out at.

Chair

Did you ever sit down as trustees and choose who you wanted as your own set of advisers?

Richard de Dombal

I think you have probably had the list of who the advisers have been during my time on the board. We consider whether we have received good advice. We have feedback and we reflect on that informally; I don’t think it’s minuted anywhere.

Chair

Did you ever discuss it as trustees? Richard did some questioning earlier. A new chairman arrives from Mount Sinai, and Richard detailed what the fees were. Did you, as trustees, not think, “Gosh this is a mega, mega, mega responsibility, and we need to think seriously about who would advise us, separate from whatever the vested interests are elsewhere”? As Margaret said, you have a duty to make the best deal possible. Did you ever have a discussion about who you wanted to serve you?

Richard de Dombal

I think it is an ongoing review, informally. For example, Towers Watson were our key adviser. They are the actuaries, and they are in the investment—

Chair

Were you at the meeting when they were appointed?

Richard de Dombal

No.

Chair

Who appointed them?

Richard de Dombal

I don’t know whether you were there, Margaret.

Dr Margaret Downes

They were appointed in my time.

Chair

By you, and by a decision of your board only?

Dr Margaret Downes

No, in my time by all the trustees. It was a decision of the three trustees to appoint Roger Urwin as our investment adviser and Paul Burbidge as our actuary, and I have to say, because I have been a chairman and a member of a number of pension schemes, that I have not come across better advisers than those two men in my walk through pension life.

Chair

Given the way it all turned out, which is really rather pitiful for the pensioners now, the advice wasn’t good enough, was it?

Dr Margaret Downes

I would challenge that, because we debated all the issues that needed to be debated—we took the advice, we listened to our advisers and we debated the issues ourselves—and came to the conclusion that our decisions were the best that could be achieved.

Richard Graham

Siobhan, you are a director of Taveta Investments Ltd. What is your role there?

Siobhan Forey

I sit on the board and attend the monthly board meetings.

Richard Graham

Why are you on the board?

Siobhan Forey

Why am I on the board? I was appointed to the board about four years ago as a result of a promotion that I received—I am the group HR director of Arcadia, as I am sure you are aware. I was leading a number of strategic projects, and I was promoted and appointed to the board.

Richard Graham

What would you describe as the main objective of Taveta Investments?

Siobhan Forey

To protect the shareholders’ interests and to govern Arcadia Group Ltd.

Richard Graham

How do you reconcile looking after the shareholders’ interests in Taveta with looking after the members’ interests in the BHS pension scheme?

Siobhan Forey

I come back to the conflict point. I declared a conflict in relation to Project Thor.

Richard Graham

We understand about declaring a conflict of interest, but that isn’t the same as actually resolving the conflict of interest. On the one hand, as a director of Taveta, you are there to maximise the returns for the shareholders, and on the other hand, as a trustee of the BHS pension scheme, you are there to protect the interests of the members, which depended for a long time on the capital injections from the corporate. How do you reconcile the two? If you are injecting money from the corporate, it means that the returns to the shareholders of Taveta will go down; if you are increasing the amount from the corporate into the pension scheme, it means that the members’ interests will be better protected. Who are you lobbying for when you try to juggle those two totally conflicting responsibilities?

Siobhan Forey

I am not sure I would call it lobbying. Ultimately as a trustee you are absolutely there to protect the members’ interests, and I am very clear that my role as a former BHS trustee and director was absolutely to do that.

Richard Graham

So you were a trustee until 2015.

Siobhan Forey

Yes.

Richard Graham

When did you become a trustee?

Siobhan Forey

November 2009.

Richard Graham

So between 2009 and 2015 what would you describe as the changes in the relationship between the corporate and the pension scheme? Would you say that the relationship improved because the corporate gave an additional commitment to make sure that the pension scheme liabilities would be met, come what may, or would you describe it slightly differently?

Siobhan Forey

There was continuous robust dialogue with the trustees and with the group finance director, who was Paul Coackley.

Richard Graham

Yes, but dialogue is not the same as what actually happened. From 2009 to 2015, what happened to the assets and the liabilities of the pension scheme?

Siobhan Forey

Ultimately, the trustees were actively managing the assets; the trustees were actively managing the liabilities. We went through two different valuations, which has been documented. There was continuous dialogue with the investment managers; there was continuous dialogue and activity with the advisers.

Richard Graham

After the first of those triennial evaluations in 2009, the recovery plan was for a period of about 12 and a half years. After the second one, while you were still a trustee, it was 23 and a half. That is a massive deterioration in a very short space of time.

Siobhan Forey

Yes, and that’s been—ultimately, the trustees took independent covenant advice from Baker Tilly to understand what BHS Ltd could afford in terms of its liabilities. We were advised by Baker Tilly that ultimately the covenant was exceptionally weak and there was no money available from BHS. And the money that was committed, which was £10 million a year, as you know, was actually given by the wider group, which again has been formally documented. So we took advice, we took independent reviews, we had legal advisers, we had covenant advisers and we had investment advice. We managed what we could within the regulatory framework and that was within our remit.

Richard Graham

When did you know, as a director of Taveta, that Project Thor was going to be withdrawn?

Siobhan Forey

I declared a conflict with Project Thor in July 2014.

Richard Graham

So you knew it was going to be withdrawn.

Siobhan Forey

No, I declared a conflict in July 2014 as a BHS trustee. I wasn’t aware that it was being withdrawn, probably, until September 2014.

Richard Graham

And when it was withdrawn, what did you feel, as a trustee of the pension scheme?

Siobhan Forey

I declared a conflict, so I wasn’t in any—

Richard Graham

Declaring a conflict is neither here nor there. What did you feel? Did you feel that you were able to fulfil your responsibilities as a trustee, knowing that the corporate were withdrawing from Project Thor, which was effectively the last hope of the covenant between the corporate and the pension scheme fulfilling its obligations?

Siobhan Forey

As trustees, we were looking at all the different options. Clearly we wanted to create as many options as available for our members and to try to protect our members’ interests. Were we disappointed? Yes, I believe we were.

Richard Graham

It didn’t occur to you to resign as a trustee?

Siobhan Forey

No.

Richard Graham

Richard, the same question. How did you reconcile that conflict of interest, and at what stage did you realise that surely the pension scheme was actually the loser?

Richard de Dombal

In terms of my conflict of interest, I am obviously not on the main board. I almost declared a conflict the other way, inasmuch as I kept acting on behalf of the pension fund. Management and everyone else knew that I was not involved in the company discussions around Project Thor. I learned nothing about Project Thor through the company. You’ve talked to Chris Martin; I was obviously working on that board at the time, so every communication I had was through the pension chair. So that’s how I resolved it: I was acting purely for the benefit of the members, along with Chris Martin and all of the first panel.

Richard Graham

So your argument, effectively, is that because you weren’t a director of Taveta, the conflict of interest wasn’t the same as it was for Siobhan.

Richard de Dombal

It was different. I wasn’t party to any of that information. I work in the Leeds accounting centre; I am 200 miles away from head office. And I just made sure that nobody through my company role talked to me about anything to do with what was going on. I acted purely in the interests of the pension fund. Again, that is an example of how we try and manage the conflict. You’ve got to go one side of the fence. I was on the pension fund side of the fence, working with the trustees, as I had been, and had no company involvement. Siobhan, in her role, couldn’t do that; she worked the other way, and had no involvement in the pension scheme for Project Thor.

Richard Graham

Earlier, when I was quizzing Margaret’s successor as chairman, Chris Martin, and asking him whether he saw any conflict of interest in his effective appointment through the advice of Towers Watson, which has subsequently remunerated his company a quarter of a million pounds for his role as chairman of the trustees, you were sitting in the back row and shaking your head. Why was that?

Richard de Dombal

It is not Towers Watson that remunerate. It is the scheme—

Richard Graham

It is the pension scheme that remunerates, yes, but Towers Watson is both the actuary and the investment adviser to the scheme; therefore as chair of the trustees he—or Margaret as his predecessor—had a responsibility to review the appropriateness of the investment strategy and actuarial advice, which later on in evidence he revealed that he actually wanted to change and de-risk. So I was questioning whether there was a conflict of interest in him reviewing them appropriately, given that they had effectively provided him with that job and remuneration. Why were you shaking your head?