Oral evidence: The sale and acquisition of BHS, HC 824

Oral evidence, 9 May 2016.

Witnesses

Lesley Titcomb, Chief Executive, The Pensions Regulator, and Nicola Parish, Director of Case Management, The Pensions Regulator, gave evidence.

Chair

Lesley, I think you know the format. Might you introduce yourself and then your colleague, or your colleague can introduce herself?

Lesley Titcomb

I am Lesley Titcomb. I am the Chief Executive of the Pensions Regulator.

Nicola Parish

I am Nicola Parish. I am the Director of Case Management.

Jeremy Quin

Lesley and Nicola, thank you for joining us. Welcome to the Committee. When did you receive the 2012 recovery plan?

Lesley Titcomb

We received it 17 months after 31 March. It was due 15 months after and it was slightly late.

Jeremy Quin

That would have been August 2013.

Lesley Titcomb

Yes.

Jeremy Quin

Between August 2013 and March of this year—if I am out by a month I apologise—following your receipt of the plan and March of this year, may we ask what you did with it?

Lesley Titcomb

Sure. So in September 2013, on receipt of the plan, we opened what we called a recovery plan case. Typically in those situations that is because it is unusual in some way, in terms of perhaps the length of its recovery plan, the strength of the employer, maybe the investment strategy or any other assumptions in that recovery plan that we have an issue with. What we do there is we engage with the trustees, typically, and we did not issue a closure letter in respect of that recovery plan. We had not accepted it as it were. It was still an open matter. The employer then came to us at various points during the following months with propositions as to the way forward and how this could be dealt with, and then we reached the point where the sale to Retail Acquisitions happened. At that point we immediately opened an anti-avoidance case.

Jeremy Quin

But there was over a year in which not a great deal happened.

Lesley Titcomb

There was engagement with the employer and the trustees about the recovery plan and trying to understand why, for example, an atypical recovery period was in place. Do you want to add anything on that?

Nicola Parish

The other thing to add is that over that period of time there were, as you said, other issues going on in the background—things that we probably cannot touch on too much today because of the investigation that is ongoing, but there were other solutions being discussed. It was not that there was not much happening, as you said. There was quite considerable activity over that period of time.

Jeremy Quin

I am conscious you were here when Alan our previous witness said that concerns had been flagged as early as March 2012. I wondered whether this would not have been a situation in which you sprang into action immediately on receipt of their recovery plan in 2012 and got to grips with it immediately.

Lesley Titcomb

As I said, we did open a case immediately on the receipt of the recovery plan.

Jeremy Quin

In this length of time, when would you have taken a more formal step regarding this recovery plan if it had not been for the takeover?

Lesley Titcomb

It is a little difficult to say on that because all these situations tend to be scheme-specific. It will depend on what responses we are getting from the trustees and the employers. It will depend on other things that happen. As Nicola said, there were further developments during the period, so it is not easy to give a timescale on this. If we feel we are not getting any traction then we will start to move towards the consideration of whether more formal powers are engaged.

Jeremy Quin

How often have you used those more formal powers?

Lesley Titcomb

We have got to the point of nearly using them many times. Do you want to talk a little bit about this?

Nicola Parish

The point is that the industry is aware of our powers in relation to scheme funding and that we have been on the point of using our scheme funding powers on a number of occasions. Very often discussion with the trustees and the employers and explanation of the powers that are available to us is often a good way of bringing people around the table and coming to a realistic view of what an appropriate recovery plan would be. It is true to say that as of now we have not had to resort to going to our determinations panel to ask them to exercise powers. We have managed to influence and bring about a satisfactory solution before that stage.

Jeremy Quin

In every case you managed to secure an agreement with which you are comfortable.

Lesley Titcomb

Yes, we have reached the point where we have either got something changed or we have understood why things are as they are and been satisfied.

Jeremy Quin

This is my last question; I know that Mr Wright want to come in. You had a previous recovery plan, the 2009 recovery plan, which I think was a 12-year recovery period. This is a near doubling of the recovery period three years later, and the covenant would have deteriorated in that period. This must be one of the most dramatic reversals in fortune of a pension fund you have seen. I am coming back on to the timing again as to when exactly you would have been issuing formal notices.

Lesley Titcomb

I cannot comment specifically, not having been there at the time. What I would say is that recovery plans of 23 years or more are very atypical. The vast majority that we see are between, say, seven and 12 years. That would be far more usual.

Chair

Would all of the schemes, Lesley, that have ended up in the PPF be ones where you had this very British conversation around the table, and then they went belly‑up on you?

Lesley Titcomb

Typically the system is predicated on the funding principally being an issue for resolution and agreement between the trustee and the employer. The regulator is there and we can try to assist, for example, if that conversation is not going well, and we can step in if they fail to agree. We can then take issue if we feel that, for example, assumptions are not prudent and that type of thing, but the system is not set up in a way that means we are exercising active ongoing supervision. The engagement is very much built around a three‑year valuation process and then the submission of a deficit recovery plan if the scheme is in deficit.

Mr Wright

Chair, I want to follow up on the line of questioning that Jeremy pursued and go back to the 2009-10 recovery plan. That, as Jeremy said, was a 12-year period in which the scheme would move into balance by January 2022. The nature of that recovery plan had the employer paying £5.5 million in 2010-11, £7.5 million in 2011-12 and £10 million in 2012-13 and thereafter increasing contributions by 10% a year. Was the regulator happy with that arrangement?

Lesley Titcomb

We had some engagement with the trustees around that plan, so it did not get closed down straightaway. We opened a case and we looked at it but we then were satisfied at that point. It reflects the flexibility that is built into the system. We could, for example, have a system that required all liabilities to be fully funded at all times. It would be expensive to industry. We do not have that. We have something that has a statutory funding objective, which the employer and the trustee have to aim for, and we as the regulator have to consider whether we think their plans are realistic. If we feel they are not, we then have to have regard as well to the ongoing sustainability of the employer and hold all these things in balance: what is the best thing to do in the circumstances to try to ensure the security of the scheme and the protection of the members’ benefits, to try to protect the Pension Protection Fund, but also to give businesses the chance to progress, to invest and to grow? We believe that a strong sponsoring employer is the best way of supporting these schemes.

Mr Wright

I am still unclear as to whether you were happy with that 2010 recovery plan in broad terms.

Lesley Titcomb

We were content in the end with the 2009 one that was signed, yes.

Mr Wright

Then you fast-forward to 2013 and you have a 23-year recovery period with the employer paying less—£9.5 million per year—and you were not happy with that. How active can you be, in terms of the powers laid down by Parliament, to step in and say, “That is not good enough”?

Lesley Titcomb

Typically what we would do in such circumstances is to talk to both the trustees and the employers to understand why they felt it was necessary to move to that, and to then consider whether we think that is reasonable, taking into account the balance that I indicated. If not, we would then start to indicate where our areas of concern were and see if the employer was prepared to move on that. We would take the trustees along with us as well and try to explain to them why we were not happy with what we were seeing, because of course if they can bring pressure to on the employer as well—

Mr Wright

Can I just push you on that? In terms of the trustees’ scheme, when Retail Acquisitions bought BHS in March 2015, the trustees for members of the scheme provided an update. In that update it refers to the £9.5 million paid by the employer and it states, and I quote, “The trustees would have preferred to receive more than this, but they acknowledged that BHS could not afford to pay any extra”. Did the trustees come to you with these concerns? If so, what did you do with them?

Lesley Titcomb

I am not aware that they did come to us with those concerns. When we launched the anti-avoidance case in March 2015, that was off our own initiative on the basis of the reports of the sale.

Mr Wright

You did not have an investigation any earlier than that.

Lesley Titcomb

Not an anti-avoidance investigation, no. We had the open situation with the 2012 valuation.

Mr Wright

What checks and work do you do to ensure that in this case BHS could not have afforded to pay any more into the pension scheme?

Lesley Titcomb

Those would be exactly the type of questions, checks and assessments that we would be doing whilst looking at a recovery plan with an employer.

Mr Wright

What did you do in this specific case?

Lesley Titcomb

I cannot ask specifically on what we were doing.

Nicola Parish

I can talk typically about how we might deal with that. Within our case team we will have people who are very skilled and experienced at looking at companies and looking at their accounts and seeking to understand the strength of an employer—its trading record, for example, or if the employer has put out any forecasts around what the business might look like—to build a picture, from our perspective, of how strong we think that employer is and how able that employer is to stand behind a pension scheme.

Mr Wright

As part of that work, would you look at the dividends policy of the company and the level to which case had been taken out of the company in previous years?

Nicola Parish

Certainly whether dividends had been paid or not would be something that we would look at. We would also look at whether there was any plan to pay dividends in the future, and it is something that you will find in our guidance that we very strongly signpost trustees to take into account as well when they are having their discussions with employers around recovery plans.

Mr Wright

What happened in this case in terms of looking at dividends policy in previous years of BHS?

Lesley Titcomb

If I may, we would rather not go into that. It is germane to our open investigation at the moment, so I would rather not discuss in too much detail precisely what we are looking at in terms of past history.

Mr Wright

It makes our job very difficult. Do you have the powers, if you are looking at dividends policy, and cash has been extracted out of the business and yet there is a pension deficit with regards to this, to say, “You really need to put more money back into the pension scheme for the employer”?

Lesley Titcomb

This is exactly where we come to with, for example, the anti‑avoidance type case that we are running at the moment. We essentially can look at two ways forward. One is to secure a financial support direction for the scheme, which is usually a decision in principle from our determinations panel with a particular person or an organisation that has some connection with the scheme that needs to provide support to it. There is then a matter of discussion as to the level of that support and the period for which it is provided, and that type of thing. The alternative course that we can do is to seek to secure what is called a contribution notice, which is for a specific amount, and again it is principally usually against individuals.

Chair

Can you put a charge or take control of any of the property of the company?

Lesley Titcomb

We would not typically. We would be looking to the trustees to try to secure better and stronger scheme funding; for example, a charge over assets somewhere else would be something that they could take into account and try to secure in order to bolster that covenant.

Chair

Do you advise trustees ever to do that?

Lesley Titcomb

We encourage them to look for alternative sources of strength, but of course we then have to consider their value, if anything, and whether they are worth the paper they are written on, to be quite frank. That is where it is essential for the trustees to take the appropriate advice to ensure they are getting something worthwhile.

Chair

There was a stage where the shops of this organisation were very valuable and they were sold and then leased back. Would you have the powers to suggest to trustees that they make moves on that front?

Lesley Titcomb

We can suggest almost anything to the trustees, though whether they choose to take us up on it is a different matter. You are illustrating exactly the type of discussion that would happen in those situations: “What other sources of comfort are available to you as trustees in these circumstances?”

Jeremy Quin

I have two questions, but just following immediate on after that, you are beholden in that respect to the calibre of the trustees. Do you have any powers to recommend a change in trustees? Do you ever question how competent a trustee panel are in executing their duties?

Lesley Titcomb

Your point is absolutely right, Mr Quin. The whole system is very, very dependent of the calibre of trustees. We have no initial approval power over trustees. In a number of circumstances, not just DB schemes, we can seek to have a trustee replaced or we could appoint an independent trustee. I should say it is a power that we have only tended to use where there is a real record of several inappropriate actions and that type of thing. A typical example of where we have used it is in scam situations, but we tend to try to achieve more through educating, enabling and facilitating the discussion between the trustees and the employer.

Jeremy Quin

I get the impression that you are quite sparing in the use of all your powers. In terms of the 18 months after the receipt of the plan—I am sorry to come back to it—in an M and A and a takeover situation, people are reviewing pension funds in a matter of weeks and taking decisions and having those discussions. I appreciate there is stuff that you cannot tell us, but can you give us some flavour as to what process you go through in order to test the adequacy of that recovery plan and engage with the trustees? Is it a matter of you looking at it over a month and then speaking to the trustees, or is it a six‑week period? How do you undergo that process?

Nicola Parish

In terms of timescale, the first thing to bear in mind is we will be looking for the co‑operation of the trustees and the employers to help us. We opened a case very quickly after the 2009 valuation and then the subsequent 2012 valuation was received. In terms of timescales, six weeks would be too long. We would be looking to engage much more quickly with the trustees and the employers in the vast majority of cases. These discussions can be, as you would appreciate, pretty complex at times. There will be a lot of information that we will want from the trustees and the employers to understand why they would think that what they had put forward was an appropriate recovery plan. That can take some time to analyse. There is also a role here for us to educate trustees and employers. Where they might have thought something was reasonable, we would be explaining all of the different ways of looking at that as a situation and encouraging them towards a solution. We would look to do that as quickly and as efficiently and effectively as we possibly can. There will come a point at which we will realise, as Lesley said, that we now have to move to the use of our powers. That very much depends on the scheme, the risk it poses and the attitude and approach that we perceive from the trustees and the employer.

Lesley Titcomb

The other point to make is that there are a number of schemes where we engage proactively with the trustees and the employer before the valuation is due, to make quite clear what our expectations are and to try to iron out some of the potential difficulties. We find that a more effective way of tackling these situations than acting after the event, once the recovery plan and valuation are in. On some of the biggest and more risky schemes, we seek to engage proactively.

Jeremy Quin

There are some hundreds of schemes that might be at risk. Do you have the resources and the ability to go through each of these and do them in a timely fashion, or is there a whole string of similar circumstances out there?

Lesley Titcomb

We, like any regulator, do have to make choices. We receive about 1,400 to 1,500 recovery plans a year at the moment, from the volume of schemes that are in deficit. We put all those through a calibration process basically looking for certain risk indicators and we then follow up on those. We make these risk-based choices. We have a significant amount of regulatory resource within the organisation. We have to make choices about how we use it across the range of our responsibilities as well, so it is not just choices within DB regulation but also with the other regulatory areas.

Jeremy Quin

There are some hundreds of schemes that might be at risk. Do you have the resources and the ability to go through each of these, and do them in a timely fashion, or is there a whole string of similar circumstances out there?

Lesley Titcomb

As any regulator has to, we do have to make choices. We receive about 1,400 to 1,500 recovery plans a year at the moment from the volume of schemes that are in deficit. We put all those through a calibration process to basically look for certain risk indicators. We then follow up on those. We make those risk based choices. We have a significant amount of regulatory resource within the organisation. We have to make choices about how we use across the range of our responsibilities as well. So it is not just choices within DB regulation, but also with the other regulatory—

Mr Wright

In terms of that proactive stance, I take it that BHS was not part of that proactive position.

Lesley Titcomb

I believe that is correct, yes.

Mr Wright

Why not? Was it not considered a risk?

Nicola Parish

There are various factors that go into determining the highest‑risk schemes.

Mr Wright

Do you have a risk register? What are the criteria to be included on that proactive bit?

Lesley Titcomb

The most significant criterion on that is probably the strength of the employer. As I have said, that is absolutely key here.

Mr Wright

We have just heard from the PPF that, in terms of any guarantee, it was not worth anything.

Lesley Titcomb

If I may, that is an entirely separate issue here. There is the strength of the employer, the sort of investment assumptions and projections that are assumed in the recovery plan, investment strategy and that type of thing. There is past history as well: what do we know about how they have tackled this challenge of the valuations in the past?

Mr Wright

Is the 18-month period relatively unusual? You would prefer weeks. I can understand the complexity, but is 18 months a long time?

Lesley Titcomb

The time it takes to deal with the recovery plan does vary hugely. Some of them are very simple; some of them are quite small as well. This would have been one of the more complex.

Nicola Parish

It would have been one at the more complex end. As discussed, other solutions were being put forward as well, which are difficult to go into now. That does mean that there is added complexity and length of time needed in order to properly assess the situation. All of these other solutions are things that, as it says, are solutions and therefore are certainly worth considering, investigating and inquiring into.

Chair

Can I just ask you before I go to Richard, Lesley, did I hear rightly that you said that when the discussions were underway you did not view the BHS scheme to be at risk?

Lesley Titcomb

No. We have to be careful about our terms here. I said that it was not one of the schemes that we engaged in proactively, as I confirmed to Mr Wright. It did not, at that point, meet the threshold for us to engage proactively. I have not gone back and examined in detail why that was, as yet.

Chair

That might need revision, might it not?

Lesley Titcomb

We would of course consider all the processes, the triggers and the risk indicators and so on in these situations. We learn from the experience as we go along. It is not a perfect science.

Richard Graham

On this point, there is a clear contradiction between two of your key objectives, potentially. One of the objectives is to reduce the risk of situations that may lead to compensation being payable for the PPF. The other is, in relation to DB schemes, which this is, to minimise any adverse impact on the sustainable growth of an employer. Clearly, these two things come to a head at the moment where you might be looking at a contribution notice and effectively imposing that on an employer. In the case of BHS, at the moment when the owners were taking out significant amounts of dividends, and it looked as if the deficit of the pension scheme was increasing, what was your thinking then about whether a contribution notice was required?

Lesley Titcomb

If I may, there are a number of things we just need to pick up on there. First of all, our sustainable growth objective has only been in place since 2014. My understanding is that it only applies in situations where we are agreeing a recovery plan.

Nicola Parish

It is when we are looking at the funding of a scheme.

Lesley Titcomb

Yes, it is when we are looking at the funding of a scheme. The type of situation you are talking about there, Mr Graham, in terms of a contribution notice, would be when we were exercising our anti-avoidance powers. We just need to be careful about that. As I recall, in terms of the timings of the extraction of the dividends they were some distance away in the past. When we are thinking about funding, we would be looking at what is available now to put in: “What can the employer afford now? What other sources of funding are available?” It is when we feel that something has happened that has triggered our anti-avoidance powers that we start to go back into the past, looking at what happened, and who did something that could have been considered as them in some way walking away from their responsibilities.

Richard Graham

When you look generically at schemes and whether they might be at risk of having to come under the PPF, presumably you have always looked at whether there are guarantees there. At what stage did you communicate with the PPF about the value of this guarantee over the BHS scheme?

Lesley Titcomb

We were aware of the PPF’s particular exercise in terms of the guarantees that might be offered up in order to reduce the levy. What I cannot answer here off the top of my head is whether, in terms of the 2012 situation, there were any guarantees involved there in terms of dealing with the deficit in the scheme as distinct from trying to reduce the levy. You have two situations in which a guarantee can be used.

Nicola Parish

Can I just interrupt there to clarify? We were just checking; the guarantee that Alan was talking about was not relied upon for scheme funding purposes. That was a guarantee that he was looking at in the context of how much the levy should be, but it was not something that was taken into account for the purposes of scheme funding.

Richard Graham

If we may, Chair, because I think it would be helpful to this Select Committee’s inquiry, what was broadly the relationship between the trustees of this scheme and the corporate, the employer behind the scheme? That is a pretty crucial thing in any pension scheme’s strength of governance.

Lesley Titcomb

That is quite difficult for Nicola and me to comment on. Neither of us have direct experience of that relationship. I have no reason to suspect it was massively different to any other relationship at the time. I genuinely do not know. Nobody has brought anything to my attention in that regard.

Richard Graham

How strong would you assess the effective covenant behind the BHS scheme to be?

Lesley Titcomb

It would be fair to say that in 2009 we regarded it as reasonable. Certainly by the time we get to 2012 it could well have been one of the factors that triggered the situation with the 2012 recovery plan.

Richard Graham

Do you think that the key issue, in a sense, is the speed of the decline of the corporate performance, the level of money being taken out of the company and then eventually its sale, while at the same time the pension fund itself was seeing an increase in the deficit?

Lesley Titcomb

Those are typically the sort of things that we would see in a situation where there was, for example, an increase in the length of the recovery plan, change in the levels of contribution of deficit repair payments and that type of thing. You will understand that I am being careful not to comment on individual situations here.

Richard Graham

I do. At that stage, when the warning signals are there and you have your third priority—to promote employer compliance with their pension responsibilities—when do you sit down with the employer and say, “We have a problem”?

Lesley Titcomb

As I said, the main regulatory engagement here is through the three‑year valuation. Parliament has not given us the power to approve those. Funds do not have to submit them to us for approval. They have to submit them to us, and we will then use them as a tool, as a regulator, to try to see whether we are okay with them, or whether any of our other powers are engaged, but we do not have to specifically sign off. As I said, if we have a plan presented to us that meets any of the triggers, then we engage with both the employer and the trustee.

Richard Graham

There was a 2012 tri-annual review.

Lesley Titcomb

That is correct, which was received 17 months later.

Richard Fuller

For good reasons or bad reasons, you do not sound like much of a regulator. You took 17 months to receive a plan. That plan had a 23-year recovery period, which sounds like it is twice the average. Your response was to “open a recovery plan case”. The fund had a £200 million deficit, which was growing, but you did not think it “required proactive response”. When you go after someone who has a fund that does not have enough money in it, your first question is, “How much can you afford?” You are not much of regulator, are you?

Lesley Titcomb

I do not agree with that statement.

Richard Fuller

I am just quoting back what was said.

Lesley Titcomb

As a regulator, we have to operate within the framework provided to us. The framework provided to us provides for the three-year valuation cycle, the submission of a recovery plan if a scheme is in deficit, and then for the vast majority of schemes it is possible either that they come up with a perfectly reasonable recovery plan or that we can, through engaging with the trustees and with the employer, ensure that anything necessary is rectified. I have to stress that it would be inappropriate to put a greater burden on the vast majority of schemes and employers who behave responsibly, either through stronger types of regulation, more proactive, continuous supervision or meeting a minimum funding requirement, for example.

Richard Fuller

You could have tougher tools in your toolkit, which you could decide to use, than you currently have, could you not?

Lesley Titcomb

The Work and Pensions Committee is well aware that I am prepared to ask for more tools in my toolkit if I need them.

Richard Fuller

Can I take you specifically to the time of the sale of British Home Stores to Retail Acquisitions? When was the Pensions Regulator advised about the possibility of a sale?

Lesley Titcomb

We were not, that I am aware, advised in advance. We learned about the sale from the newspapers.

Richard Fuller

They just dropped it on you.

Lesley Titcomb

Yes. As I have indicated, we had been engaging with them over the period since the 2012 valuation. They had discussed a number of propositions with us, and then the next we heard that there was a specific development was the sale. At that point, we immediately triggered an anti-avoidance case, which is exactly what we should do in these circumstances. That is why the powers are there.

Richard Fuller

Just to be clear, in the time that British Home Stores, and the owners of British Home Stores, were involved in a detailed series of discussions with you about a massive deficit in the pension fund—their obligation to the employees—they did not have one conversation with you to say, “You know what? We are thinking of selling this company”?

Lesley Titcomb

I cannot say that. I am referring specifically to the sale for a pound to Retail Acquisitions.

Richard Fuller

That is what I am saying; they did not say—

Lesley Titcomb

Looking at what we would have known about the situation at BHS and so on generally, I cannot believe that those engaged would not have thought that a sale of some sort was possible. That was definitely a possibility. I cannot really say more. I was not directly involved with those discussions.

Richard Fuller

Just to clarify, the idea that a sale might be possible in the circumstances may have been something that was discussed. However, this particular company, Retail Acquisitions, the regulator found out via the newspapers.

Lesley Titcomb

That is correct.

Richard Fuller

You have certain powers, do you not, to act? Obviously, you acted after the sale. Were there any other powers that you could have invoked other than the anti-avoidance case?

Nicola Parish

We have talked already about the scheme funding powers. That is a set of powers that is available to us that enables us to impose a recovery plan, or enables us to impose deficit repair contributions. That is something that we would have had in our minds at the time. We were trying to bring the trustees and the employer towards a reasonable and appropriate recovery plan. That is a power that was available to us.

Richard Fuller

Could I just ask you specifically about third party notices? It is a power, if I have this right, to persons whose failure to do something is causing or has caused someone to contravene legislation. Can you just explain very briefly when you might invoke that power, particularly with relation to a transaction of the sale of one company to another company?

Nicola Parish

It does not obviously fit into a situation where you are looking at a transaction. One time when you might use a third-party notice, when you are talking about scheme funding, might be if the trustees were to come to us and say, “We need a particular sort of information and we cannot get hold of it, and that is causing us to be unable to agree a recovery plan”. We might then look to see whether we could use an improvement notice to require that third party to provide the information to a trustee, in order to enable the trustee to then be informed and be able to participate in scheme funding discussions and reach a plan. An improvement notice, which you have probably read, needs to set out specifically the steps that a party needs to take, and then is enforceable through the imposition of fines. Where those powers get you is often also worth bearing in mind in terms of whether it is a suitable power to use in the circumstances that you are looking at.

Richard Fuller

Just going back, if you had known that one of our finest retailers was being sold to Retail Acquisitions prior to the sale, would you have done anything?

Lesley Titcomb

Yes, absolutely. We would have gone and asked them, “What is the provision for the pension scheme in these situations?” Effectively, you are into a continuation and variation of the funding discussion. It is just that because here we have the sale, and it has happened, we decided to switch mode at that point and actually launch a formal investigation as to whether anti-avoidance was relevant, and whether any of the parties connected with all of this—of which there are a large number—had walked away from their responsibilities.

Richard Fuller

Just to be quite clear, is there anything specific in the nature of Retail Acquisitions, as an acquirer of British Home Stores, that particularly would have raised your concerns?

Lesley Titcomb

I do not want to comment too much on this because of the ongoing investigation, but typically in looking at such situations we will take into account the strength of the new owner, and the record, if you like, of the individuals connected with that.

Chair

Did you do that? Given that the main acquirer had two, if not three, bankruptcy orders made against it, did that not come up on your radar at all?

Lesley Titcomb

If I may, again, this is very much germane to the current investigation. Typically what happens is we launch an anti-avoidance investigation of who we think may be able to help us, which can go from the directly concerned parties to their advisers and other people. We did that in this case, and we received in response to those notices over 70,000 documents to review. I would prefer not to speculate on who we have targeted and why.

Chair

You could have found news about Mr Chappell from the web, could you not have? You did not have to send for 70,000 documents.

Lesley Titcomb

One can find an awful lot that is very interesting about people from the web. It is an extremely useful source of information. The point is that by the time we became aware of it the sale had happened, hence the choice to move into anti-avoidance territory.

Mr Wright

Just following on from that, did you have a good relationship with the former employer, in terms of BHS? I mean the former owner, prior to Retail Acquisitions.

Lesley Titcomb

Can you define “good”?

Mr Wright

That is a big question. Who owned BHS? In terms of the people that you were discussing, there were a number of propositions. Did you have a good relationship?

Lesley Titcomb

I do not think, necessarily, as a regulator, I would want the relationship to be good. It was constructive.

Mr Wright

It was open, honest and positive.

Lesley Titcomb

We were engaging with them on an ongoing basis. These are never easy situations, and we are the regulator, so we are not always welcome at the table.

Mr Wright

Just to clarify, in terms of what Richard was saying, one of the range of options and different propositions was, “We could be selling this”.

Lesley Titcomb

Yes. No one who was working on this type of case, having that sort of engagement with any employer in this sort of situation, would fail to see that a sale was possible.

Mr Wright

Does the fact that you heard about it in the newspapers indicate that the whole acquisition and sale process was very quick, and that Retail Acquisitions came along quickly and the deal was done in a matter of moments?

Lesley Titcomb

I really cannot speculate on that.

Chair

When you say you cannot speculate now, when will you tell us whether the scenario that Iain has just described is true or one where it is much longer?

Lesley Titcomb

If I may, of course our anti-avoidance investigation, which is underway at the moment, is focused on the particular things that are relevant to us as the Pensions Regulator and the exercise of those powers. These are complex cases; they tend to take quite a long time. As you will be aware, the decision to, for example, issue a warning notice sits with us, but that then is not the final situation. That warning notice then has to be turned into a final notice by the determinations panel at the regulator, and somebody who is the target of that would have the right of appeal to the upper tribunal. Typically these cases are contested quite vociferously, so it may be some time before we reach a final conclusion on this. In such situations, we then publish what we call a section 89 report, which sets out what happened, what powers we exercised, why we did do this and why we did not do that. That will be the explanation of our role. I should of course remind you that there are other investigations going on, which are relevant here. For example, there is the one announced by the Insolvency Service, which may be much better placed to look at the actual nature of any M and A transactions that are relevant here. Our focus is very specifically on ensuring that the pension scheme gets what it is due.

Chair

I can see that. Can I just go back to an imaginary company? It is selling a going business to another company; if you looked on the web, you could find that they may have been bankrupted once, twice or three times. Oscar Wilde made that marvellous statement about losing one parent; they have been bankrupted three times? I am just wondering about how you approach this. Does no one do that preliminary work for you to see whether in fact the company that is going to acquire a going business is a prudent, proper company to sell to?

Lesley Titcomb

If the trustees come to us and say, “We are aware that the sponsor is looking to sell the business”, then absolutely we will work with the trustees to understand.

Chair

That is the trustees’ responsibility. What is your responsibility, given that you had this on your radar?

Lesley Titcomb

We can only act on the basis of what we know here. Our responsibility here will be in terms of the ongoing funding of the scheme in the event of a sale. The fact that we have launched an anti-avoidance investigation must suggest that, given the event which triggered that, we are concerned that as part of that sale there are situations where we have concerns that not all the parties are meeting their ongoing responsibilities.

Chair

No one seems to have blown the whistle, do they?

Jeremy Quin

Lesley, if I take you back to what you said to Mr Wright earlier, you try to build a good relationship.

Lesley Titcomb

“Constructive” I think was the word I used.

Jeremy Quin

Whatever; a good or constructive relationship with the regulator does involve an element of respect and even fear, dare I say it. I am just concerned with a situation where issues have been flagged in March 2012, they have been late getting their recovery plan to you and you have been working on it for 18 months. You were doing things; we do not know what they are, but you were doing things over that period. It shows a marked lack of respect that you read about this in the papers. All we are talking about is a telephone call.

Lesley Titcomb

Indeed.

Jeremy Quin

In terms of the trustees, they have responsibilities in these circumstances, do they not?

Lesley Titcomb

They have ongoing responsibilities, yes.

Jeremy Quin

They should have been made aware of this transaction at an earlier stage. I cannot believe that it is just overnight. They should have been made aware. They should have been investigating implications for the deferred pensioners, and if they had any concerns they should have been flagging it with you. Is that correct?

Lesley Titcomb

That is correct.

Jeremy Quin

Are you aware that the trustees were aware, or, as far as you are aware—too many “awares” here—did the trustees read about it in the paper?

Lesley Titcomb

All I can tell you is that the trustees did not bring this specific sale to Retail Acquisitions to our attention.

Jeremy Quin

You cannot speak for them.

Lesley Titcomb

But I cannot speak for them otherwise.

Chair

We may ask them that question soon.

Richard Graham

That is certainly going to be a crucial step forward. Lesley, just in terms of the Pension Regulator’s powers—what you can do and have done—can you give us a sense of how often you have had these anti-avoidance investigations? How many cases have you had, say over the last five years? What, typically, has been the outcome of these? For example, are you able to require an individual or a corporate to actually put additional funding into a pension scheme?

Lesley Titcomb

Let me start and then Nicola will pick up. Yes, we can require, as I said, a variety of parties either to provide some form of ongoing financial support to an ongoing scheme, or to provide a specific amount that we think they should provide.

Richard Graham

You have done that historically.

Lesley Titcomb

We have done so, yes, absolutely.

Richard Graham

When you have done that, have the individuals or businesses involved paid?

Lesley Titcomb

I believe so. To be fair, they do not pay us. It is arranged between them and the trustees. I have no reason to suppose it has not materialised.

Richard Graham

Typically, a timespan is agreed within which those moneys should be transferred.

Lesley Titcomb

That is right.

Richard Graham

It is up to the scheme trustees to come back to you if that does not happen within the agreed time.

Lesley Titcomb

That is correct, yes.

Nicola Parish

Or if the scheme is in the PPF; then it would be a discussion with the PPF about payment.

Lesley Titcomb

Yes, because effectively then the PPF is in the space with the trustees.

Richard Graham

At what stage does that responsibility for effectively chasing the verdict of the anti-avoidance investigation move from you to the PPF? Does the PPF wait to take the scheme in until the results of your anti-avoidance inquiry, or does it take a scheme onto its books anyway, but your anti-avoidance investigation conclusions are still valid whether it has or has not been accepted in?

Lesley Titcomb

This gets a little complicated. The PPF runs what is called an assessment period when a scheme is heading for it. Effectively, it is when it is assessing what the real situation is in terms of the available assets and liabilities, what it might get in the insolvency and that kind of thing.

Richard Graham

And the scheme applies to—

Lesley Titcomb

Effectively it does, yes.

Richard Graham

The trustees of this particular scheme have already applied.

Nicola Parish

There will have been a trigger for a scheme to go into the PPF.

Lesley Titcomb

An insolvency trigger.

Nicola Parish

For example, it would have been the launch of a CVA or the appointment of an administrator, typically.

Richard Graham

Insolvency would be one trigger.

Nicola Parish

Yes, insolvency would be a trigger.

Richard Graham

At that stage the PPF is obliged to effectively—

Nicola Parish

The PPF then takes the scheme in, and it sits in that assessment period. The purpose of that assessment period is for the PPF to consider the circumstances of the scheme and what action the PPF might need to—

Lesley Titcomb

As Alan said, that does not preclude us at this point from using our anti-avoidance powers.

Richard Graham

In this case, you have already triggered the anti-avoidance investigation.

Lesley Titcomb

We had, yes.

Richard Graham

So there is no need for the PPF to ask you to do that.

Lesley Titcomb

Correct.

Richard Graham

The results of your investigation will take effect whether or not the scheme is already in the PPF. Is that correct?

Lesley Titcomb

That is right. There is perhaps one point we should say. If for any reason the assessment period were to have finished and it actually crystallised and was in the PPF in the final form, then our ability to use a financial support direction falls away because there is no ongoing scheme. You would then look at the contribution notice as the alternative means.

Richard Graham

What is the period of the assessment and how long will your investigation take? Is there any danger that your investigation will not finish before the assessment period?

Nicola Parish

Whether a scheme comes out of the assessment is pretty much in the gift of the PPF anyway. Clearly, we are working with the PPF.

Richard Graham

Very closely.

Nicola Parish

Yes, indeed.

Richard Graham

In order to make sure that the assessment period is finished.

Nicola Parish

Exactly, and that nothing prejudicial is done.

Richard Graham

How long will this go on for, effectively? How long would you expect your investigation to take?

Nicola Parish

You heard from Lesley that we have 70,000 documents at the moment that we are reviewing. We are hoping that we will be able to come to a view by the end of the year.

Lesley Titcomb

We expect to make significant progress by the end of this year.

Richard Graham

During that period, the trustees of the scheme are still there and they still retain the responsibility for the scheme.

Nicola Parish

The PPF has stepped into the shoes of the trustees at this point in time. They need to once it goes into the assessment period.

Richard Graham

As far as you are concerned, the trustees no longer have responsibility for the scheme.

Lesley Titcomb

They are still there, are they not? The PPF is effectively standing in their shoes. Everything significant to be done with the scheme has to be okay with the PPF during that period.

Chair

By the end of the year you mean this year?

Lesley Titcomb

I mean 2016, for the avoidance of doubt, yes.

Michelle Thomson

Just remind me when you started.

Lesley Titcomb

We started the anti-avoidance investigation in March 2015.

Michelle Thomson

Is that a typical timescale or is it hard to tell?

Lesley Titcomb

They really do vary hugely, these schemes. Above 10, yes, that is rare. Some of them resolve much quicker. It all depends on how much of the due process the targets choose to exploit as well. Do they want to appeal? Do they want to make representations? There are all of those kinds of things. There are checks and balances there.

Michelle Thomson

Moving on then, what specific actions can you take against both current and previous owners in cases such as BHS?

Nicola Parish

The main powers that we would be looking at are, as discussed, the avoidance powers. The first one is the financial support direction. Were that to be successful against potential defendants then we can be looking for a range of financial support. That can be hard cash. Depending entirely on the circumstances it can be, for example, a guarantee. Lesley alluded to financial support directions earlier. These are decisions made by a determinations panel, which is a panel entirely independent of the case team. They agree in principle to the idea of a financial support direction. How much that amounts to and in what form that comes is subject to agreements subsequent to the determination panel determining there should be financial support for a scheme.

Michelle Thomson

In terms of positive outcomes, what is your feeling of success in the case of BHS specifically?

Nicola Parish

Talking about the specifics of an investigation that is on foot would be very difficult.

Lesley Titcomb

One thing I would say, though, is that we have been running a year’s investigation so far, and there is more to go. That is an expensive and time‑consuming business. I do not disburse levy payers’ money without very careful consideration of whether that is the right thing to do. We obviously re-examine the case at various checkpoints to consider whether it is appropriate to continue. We have been going for a year and we are still going.

Michelle Thomson

What we have been exploring today is the somewhat opaque nature, and obviously you will have sight of certain elements of your case in terms of anti-avoidance. How equipped are you as a regulator to get that wider oversight, or will you be able to pull in other people as appropriate?

Lesley Titcomb

We can absolutely get in all the expert support we need, and we are doing that. I would stress again that as the Pensions Regulator we have a limited remit here, and I am pursuing the actions that I think are appropriate to trying to secure the position of the pension scheme. I am not doing a full investigation of the activities of the various companies, their directors, their owners or whatever in this situation. We are a regulator of limited remit.

Michelle Thomson

In terms of who ultimately has oversight of the success of your own investigation, who holds the accountability for that?

Lesley Titcomb

I do as the accounting officer for the Pensions Regulator, and I am accountable to Parliament through the DWP.

Richard Graham

Just on that very point, if I may, Chair, can you just confirm that when you reach the conclusion of your investigation, and let us suppose that it is a requirement on individuals or businesses to contribute to the pension scheme, is it legally mandatory for them to comply with that?

Nicola Parish

A contribution notice can be enforced through the courts in the same way as any other debt can be enforced. Going back to your questions earlier, were any moneys due under a contribution notice not to be paid up, the PPF would then be able to pursue that as a debt to the pension scheme.

Richard Graham

Would it have to go through the courts?

Lesley Titcomb

It would have RIPA procedures, yes.

Nicola Parish

I did not finish the question about contribution and the powers. I do not know if you want me to carry on.

Richard Graham

It would be very helpful, Chairman, to know the contributions.

Michelle Thomson

Just to pick up on that, in terms of jurisdiction for going through the courts, how does that work?

Lesley Titcomb

In terms of the regulatory decisions that we take, as I said, first of all the executive do the work. The determinations panel, which is part of the Pensions Regulator but consists of people who do not work full-time with us, including lawyers and so on, makes a determination. We then get to the point where if somebody appeals it we go to the upper tribunal. We are into judicial procedure there within the upper tribunal, so it switches, and they hear it from scratch anew. That is about the regulatory decisions. For the enforcement of the actual sanction we are into a different situation and, as Nicola said, you would be into the normal debt recovery.

Michelle Thomson

Do you have precedent to draw on for this sort of scale?

Nicola Parish

We have published a number of section 89 reports in relation to previous actions we have taken on avoidance. Probably the one that you are most aware of is the Lehman case; that resulted in a settlement of £184 million, which was full buyout for the members. All members got all of their benefits. That is probably one that is comparable.

Mr Wright

Lesley, as accounting officer, how do you decide where and how to allocate your resources?

Lesley Titcomb

First of all, I should say that I am aware, and I will tackle it head-on, that there have been comments about us having a reduced level of resources in our current corporate plan. As with all public bodies, we were faced with a spending review challenge. I want to make clear that we have maintained, nay increased, our level of frontline regulatory resource in this year. The savings we have made have been in our back office and support systems. We have maintained a level of resource, principally in Nicola’s area here, but not solely, that we applied to frontline regulation. How we make choices in an area such as this is that we look at the various types of situation that we have to work at through cases. We determine what our risk appetite is, and we will try to allocate our resources to the riskiest situations or areas. We will review that, typically quarterly, through the year to see whether we need to adjust it, discuss it with our board and that type of thing.

Mr Wright

In answer to a previous question, and I am paraphrasing a little bit, you said in relation to this you will have access to all available experts. Experts are expensive.

Lesley Titcomb

They are, yes.

Mr Wright

How are you able to allocate resources regarding that?

Lesley Titcomb

We have a specific arrangement with the DWP where a certain amount of our budget is held as a case type reserve that we can draw on for these situations. I have also had specific conversations with the DWP that should we face, god forbid, a glut of avoidance cases, for example, that is exactly the sort of situation where we would expect to go to the DWP and ask for additional resources.

Mr Wright

How much significance do you anticipate, in terms of time and resources, BHS will now play in your organisation?

Lesley Titcomb

It will be significant, but it is very easy, if I may say so, for these cases to chew up a huge amount of the organisation’s resources if we are not careful. It is my responsibility to ensure that we do not lose sight of our many other important responsibilities. Examples that I know are of interest to this Committee include what we are doing on master trusts and our responsibilities around auto-enrolment. We have a very good team on this, but it is a limited team. We can buy in the additional expertise that we need to support it. If I threw all 500 people in the organisation at this case, would it make it go quicker? Almost certainly that would be an ineffective way of running it. You need a good, focused team of the right people, with the right skills, working closely together.

Mr Wright

Are you prepared to go long on it in order to get a result?

Lesley Titcomb

Yes.

Mr Wright

Like Chilcot.

Lesley Titcomb

I should perhaps not go there. As I said, I would hope we would have made significant progress by the end of this year. I am very conscious of the fact that justice delayed is justice denied. Every regulator will sit here and tell you that it would be great if we could do enforcement cases quicker, but it is jolly difficult when push comes to shove.

Amanda Solloway

Just to clear up on that point, I was just thinking in a situation like this I do not know who the recovery would be from. I wonder at what point it becomes not viable, because you are saying it is a very expensive process. Do you do an analysis at the start to see whether or not there will be any reward at the end of it?

Nicola Parish

Certainly, we do. Going back to the beginning, we would have a case strategy at the outset to have a look and see what the information that we have at that point in time tells us may have happened. As we go gathering information there is an ongoing process of assessing that information to determine, “Is that strengthening what we thought might be a case for use of our powers or not?” as well as how that might translate into support or contributions. It is an ongoing process of assessing that. Once we get to the end of it, then obviously we will take a final view on, “What does that now look like?” in terms of, for example, a cash figure attached to a contribution notice or to a financial support direction.

Jeremy Quin

We are all focused, or at least I am, on the length of time some of these things are taking, including the length of time it takes for you to be engaged and the length of time it takes for your actions to play out. I am not questioning your integrity or that of your staff in any way, shape or form, but you talk about the skills base. Do you have actuaries, legally trained professionals and transaction-oriented individuals?

Lesley Titcomb

Yes.

Jeremy Quin

You can have a team that has all of the skills.

Lesley Titcomb

Absolutely. We have actuaries, we have investment specialists and we have what we call business analysts who are very often M and A specialists and restructuring specialists.

Jeremy Quin

So you can do the job. You are not just passing it out and getting an expert in.

Lesley Titcomb

Absolutely. Let me pick an example where we might need particular help. We might need tax advice. We might need advice on valuations of properties and that type of thing. We might need advice on M and A situations and restructurings that goes beyond the experience of the people in the team, and so on and so forth. We very often engage external counsel because this is hard fought litigation and we will find ourselves probably with QCs up against us.

Jeremy Quin

Thank you for answering my question, which is that you do have the skill set inside the department to get a team that can do the job.

Lesley Titcomb

Absolutely. We supplement the team.

Jeremy Quin

That is not the issue in terms of the time it takes.

Lesley Titcomb

That is correct.

Chair

Lesley, the more these two sessions have gone on, it does seem to one member, me, that you have an impossible task, and that we should not ask you to perform it. First of all, when pension funds look as though they are in difficulty, you set a recovery plan over years. It seems to me that there is a public interest that there is a body to which you have to refer to see whether they agree with you on that. Thirdly, when it goes wrong you launch the inquiry. Do you not think they are three separate functions and it would be better for you to make the recovery plan, people question whether that is advisable or whether it pushes the firm over, and then when it is like BHS you, in a sense, are conducting one of the main inquiries?

Lesley Titcomb

I have worked in regulation for 25 years, and all of the regulators that I have worked in in their various forms have had objectives that at any particular time can be in tension. It is the challenge for the regulator to balance that and to try to resolve those issues of tension, and to apply the resources in the right place. I am not sure that a more fragmented structure would not necessarily mean that we would arrive at better decisions as a whole, or better outcomes if you like. We have been given steers at various points during the process, including the creation of the legislative framework that underpins the regulator, about what we should be focusing on. We also have to be an organisation that learns from experience, and takes account of the views of key stakeholders and the views of Parliament in what we are doing. Do I think necessarily changing the structure, on the basis of one particular case, is the right thing to do? I am not sure I do. We have to look at the whole situation and not just very difficult and unfortunate situations that we see now. The fact is the vast majority of employers out there are doing the right thing. We need to recognise that.

Chair

The pressures on those employers are going to increase, are they not, as we live longer?

Lesley Titcomb

They are, absolutely.

Chair

Maybe the returns on investments are going to be a lot less than we thought they would be when setting up the schemes.

Lesley Titcomb

I completely accept that, and I do think, particularly given the ongoing difficult economic circumstances, with low gilt yields and all of those types of things, it has proved to be very difficult for trustees and employers. We are publishing our annual funding statement later this week. The economic circumstances remain very challenging for defined benefit schemes. That will not come as a surprise to anyone. The fact is, if we use the flexibility that is built into the system, that says that you do not have to pay and fund everything today, and that you can, as a responsible employer, take the time, and the regulator will be understanding about what is affordable to your business, then I think we can genuinely work our way through this so that the DB schemes will play out. After all, the majority of them are now closed to future accrual. Of course, difficult situations like this do not help.

Chair

If they are, in a sense, like pyramid sales schemes then it is not always an advantage to close the scheme, is it?

Lesley Titcomb

I would not like to describe DB pension schemes in this country as like pyramid sales. It would be very unfortunate to say that.

Chair

They never are at the early stages, are they?

Lesley Titcomb

It is fair to say that DB pensions are long-term businesses and you have to take a long-term view. Providing the employer behaves responsibly that should not be a problem.

Chair

Before I bring Richard in to perhaps end this session, when you came before us earlier this year you were very robust about saying that you needed new powers. The Pensions Minister was equally robust in saying for these master trusts. Did you clear that view with her before you uttered it, so that if in fact you thought you needed new powers you could say that off your own bat?

Lesley Titcomb

To be quite honest, Chairman, I cannot recall whether I mentioned it. It was one of the first things that became apparent to me when I walked in the door as a regulator, because it was a key difference. It had also become very apparent to her very quickly when she took over as the Pensions Minister. We were singing from the same hymn sheet from a very early stage, so I cannot honestly answer your question there because I do not know. Do I feel confident that I could speak out and say where I felt that our toolkit was deficient? Absolutely, I do. Indeed, I also feel that I could go and talk to the DWP and I would receive a good hearing as well.

Chair

On your risk calculator, we have a number of schemes now that have no parent company, called zombie schemes, which is partly, I suppose, not to confuse them with orphan schemes. How important and worrying is that trend to you?

Lesley Titcomb

In both DB and DC schemes, we do have a number of schemes that are left without a strong sponsor and that kind of thing. That is something that we need to explore. There are mechanisms emerging within the market to consolidate some of those schemes. If you were to look at the type of thing that we discuss around what might be useful powers, that would be one area for us, so that we could perhaps give the direction to trustees that they need to seriously think about it.

Chair

Some schemes, like the Trafalgar House scheme, are rather large.

Lesley Titcomb

There are number. It is not just the small schemes; you are absolutely right. One of the things we always have to have regard to is, for example, in the type of regulatory apportionment arrangement that Alan talked about—and that, not surprisingly, he is very interested in—is that situation’s ongoing viability and sustainability. Otherwise, all that will happen is that he will get it 10 years down the track in a worse state than if he had it now.

Richard Fuller

Chairman, you provoked me to ask a question. I was not going to ask a question. I do think that Frank has raised a point about this balance between flexibility and rigidity, and the consequence of your, if I may say, somewhat undue faith in the benefit of flexibility, puts you in an almost impossible situation. With that flexibility, you are the ones that have to determine whether this is right or that is not right. I am not sure of the benefit of, “Let me see what I can do” versus “Rules are rules” is beneficial, particularly in the context where you are up against people whose interests where there is flexibility means they are going to push for flexibility. Does that not just end up with someone turning up one day and saying, “Here is the paper. Guess what? I sold the company”?

Lesley Titcomb

There will always be a few people that do not play by the rules.

Richard Fuller

They do not have to, because you believe in flexibility. There are no rules.

Lesley Titcomb

If I may, I am operating within the framework that has been set for me by Parliament here.

Chair

We keep asking you whether you want to change that.

Lesley Titcomb

Indeed. As I have said, I am always happy to look at what we learn from particular situations like this. The BHS situation, if I may point out, crystallised two weeks ago. I have not yet had a chance to reflect on all the lessons that might come out of such a situation.

Richard Fuller

That is the crux, is it not? Your belief in flexibility does not work, because you do not have enough teeth until it is too late.

Lesley Titcomb

No, I disagree. For the vast majority of schemes it does work. We see that if there is a strong, well behaved, responsible employer standing behind a scheme that is the best thing for it, and then it is then right to give that sufficient time to work through. It is difficult when there are people who are irresponsible. I agree it is difficult. I do not believe that that is the case in the vast majority of situations.

Chair

Thank you very much, Nicola and Lesley. Oral evidence: The sale and acquisition of BHS, HC 824