Oral evidence: The sale and acquisition of BHS, HC 54
Oral evidence, 25 May 2016.
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?
Richard de Dombal
No, it was more to do with the fact that, as Dr Margaret has explained, Towers Watson have been impeccable in terms of their advice, but let us put that aside for the process—
Richard Graham
We might come back to that.
Richard de Dombal
Well, that’s fair enough. Also, in the process of appointing Dr Margaret’s successor we went through due process to find, as you said, an important person to replace Dr Margaret, who had been on the board for 13 years. Where do you do that as a board of trustees who are not sure about who there is in the marketplace? You might ask your advisers. The advisers came up with many people, I think—I was not in that committee.
Richard Graham
No, indeed. No one is questioning that. I was just interested in the fact that apparently, from your body language, you saw no possible conflict of interest in the fact that the man who was receiving, directly or indirectly, a quarter of a million pounds might not wish to review very precisely the terms and review of what the advisers are actually performing at that stage. I was just interested. It seems to me that there is an approach to conflict of interest that neither of you have been able to manage very well. I could go on, Chairman, but I suspect that there are others who want to come in.
Chair
It is really good—thank you very much.
Amanda Solloway
Going back to the recovery plan for the 2009 valuation, the regulator notes that you “secured improvements” over the company’s original proposed recovery plan. What were those improvements?
Dr Margaret Downes
The regulator identified three issues that she wished us to observe for the next valuation—the 2012 valuation. They were what payments are possible to achieve, how long the recovery period would be, and the prudence of the assumptions. Those three issues are basic to any valuation. The prudence of the assumptions was something that we addressed very early on in our 2012 valuation, in so far as the financial situation of our sponsor, BHS Ltd, had deteriorated substantially; losses had continued and therefore it was in a weaker situation than it had been at the 2009 situation. So in the 2012 valuation we increased the prudence that we had adopted in the 2009 valuation, and that will be part of the reason why the liabilities escalated so much in the 2012 one. That deals with the assumptions that she or he—whoever was the regulator then—asked us to address. So far as the recovery period is concerned—you were probably aware of this already—from the very beginning of our reviewing, setting, and beginning to work on the 2012 valuation, it was made clear to us that the maximum amount that would be given by the sponsor was £10 million a year. They never veered from that, no matter how much we addressed endeavouring to increase that, either with Philip Green or with Paul Budge. They never moved up; we could not get them to move away from that.
Chair
Did you have it in writing from Sir Philip or Mr Budge that £10 million was the maximum?
Dr Margaret Downes
I may not have it in writing, but what I do have is my notes and my report to the trustees and also notes from our investment adviser.
Chair
But did you ever meet Sir Philip or Mr Budge and they told you that £10 million is the limit?
Dr Margaret Downes
Oh, yes. I met Mr Budge on a number of occasions. I met him at least six times during the course of the 2012 valuation.
Chair
And Sir Philip?
Dr Margaret Downes
Sir Philip I met once. The meeting with Sir Philip—Mr Budge was also present, as was Sir Philip’s son—was to review our investment strategy. That was the meeting’s purpose, but at the very beginning of the meeting he stated categorically that he was not prepared, or the sponsor was not prepared, to give any more money than £10 million a year, but he did commit to give it “into the future”. Those were the words he used.
Chair
So this was Sir Philip.
Dr Margaret Downes
Yes.
Chair
And he referred to himself as the sponsor.
Dr Margaret Downes
No, he did not.
Chair
But you knew he was.
Dr Margaret Downes
I think we appreciated that he was a very important person in BHS Ltd and in Taveta.
Chair
When you say “very important”, are you being modest, Margaret? Was he not one of these extraordinary people who just ran it all?
Dr Margaret Downes
He is different to most.
Chair
Please go on, because we are trying to get a flavour of how power operates within the structures.
Dr Margaret Downes
The structures of?
Chair
There is a legal structure in which we are talking to you about your role as trustees and the legal structure of the company, but great wars are won by great generals, and I want to get a flavour of Sir Philip from you. When you walked in that room, was there one person who you knew called the shots?
Dr Margaret Downes
Let me first say that in the entire period of my chairmanship, Sir Philip never attended a trustee meeting.
Chair
Right.
Dr Margaret Downes
So that was absolutely clear.
Chair
And how many times did you meet him, Margaret?
Dr Margaret Downes
I met him four or five times in the totality of my years there—13 years, finishing in 2013.
Chair
Did you or he initiate the meetings? Did you ask for the meetings, or did he ask to see you?
Dr Margaret Downes
He asked for the meetings, and he would have his investment advisers with him. He was much more interested in the investment side of the pension funds than in any other side. So far as I and my co-trustees were concerned, that was his interest. He always had advisers with him, as I would have had at the meetings. He might make proposals or have ideas as to what we might include in our investment strategy; we always took those into account. After the meetings our investment adviser and his investment adviser would get together, and if there were any slight amendments to our policy they would be implemented, but we had a very, very clear strategic investment policy and we very seldom had to make any alterations.
Chair
My apologies, I took questioning away from you, Amanda.
Amanda Solloway
I was going to ask the same questions, because it is intriguing. You said right at the beginning that your interest was in the membership of the pension schemes, and that has come across incredibly strongly. When you had the meeting with Philip Green, did you believe it was in the interest of the members, or was it more about the investment being made?
Dr Margaret Downes
The discussions with Sir Philip would have been on investments, but I have to say that I do believe that he had at heart a caring approach towards the 22,000-odd investment members. He appeared to me to be aware that he had so many members and especially that a number of them were lower-paid, and he was conscious of the fact that any impact upon them—that would be my reading of it—would be negative.
Chair
You talk about the caring side and him saying, “It’s £10 million going into the future.” Do your notes tell you how far into the future the £10 million every year was going to go, Margaret?
Dr Margaret Downes
No. The unfortunate thing was that the outcome of agreeing the assumptions, which our sponsor—the company—did, and the £10 million, was that the third leg of that journey had to be 23 years, but he appeared to commit to that. I cannot say for sure and nor can our investment adviser, because I cannot really recall that clearly, but I had the impression that he was prepared to acknowledge the length of it and appreciate it. His words “into the future” gave us some confidence there.
Chair
When he was talking about £10 million going on, did he ever say, “This is going to be a long-term rescue scheme and I’m in it for 23 years”? Did he ever talk about 23 years to you, Margaret?
Dr Margaret Downes
I think he mentioned 20 years at that meeting, but also, in the last valuation we did have a statement that, in the event of BHS becoming profitable, we would review the entire funding arrangements. I want to make quite clear that our understanding from all our discussions with Paul Budge over the years and to the very end was that the intention was that BHS was going to continue to be a success—they were moving towards it being a successful company. There was £100 million invested in the last few years, there were new concessions—new inlets—put in the shops, the shops were being renewed and there was a new management team put in place in 2012. We were given no indication that the plan was other than that—he was the great retailer as well, so we felt confident that the turnaround situation was in hand and that they were moving towards that.
Amanda Solloway
Continuing that, you mentioned the caring side, and I am interested that it was care for the members. I get the £10 million a year, although it does not seem as though that was a large amount given what probably was needed. I also see the 20 years as a commitment to the long term. What else was there that indicated to you that it was a caring side of Sir Philip Green that was wanting to do this?
Dr Margaret Downes
I think he expressed at some stage that, if funds were available and if BHS Ltd was in a position to contribute to the pension funds more than they could contribute, he would be very happy about that happening. As I have already said, it was quite clear from the very beginning that £10 million was their figure, and we could not move them off that. When we had our covenant assessment, Baker Tilly advised us that, in fact—I think we appreciated that already—unless there was support from the wider group, BHS could not pay £10 million a year.
Amanda Solloway
Finally, did you hear from the regulator at all from March 2011 to June 2013?
Dr Margaret Downes
No, we had no contact with the regulator, short of statutory, which would be submitted by our manager and by that team. There was no contact between the trustees after this letter that I am aware of.
Ms Buck
I am just trying to understand exactly how the 23-year recovery plan fitted with that commitment, because it would seem to me that the specificity of 23 years—that is very specific—has to rest on a firm commitment to at least the £10 million contribution, and yet you’re saying that this was long-term, it was expressed in sort of general terms and it wasn’t specific, the 23 years. Why not?
Dr Margaret Downes
I am not quite clear—
Ms Buck
I am just trying to understand how it can be that a commitment was not given to a support that would fit with the period of the recovery plan.
Dr Margaret Downes
The commitment was given. Let me be quite clear: the commitment was not only given but given in writing to the Pensions Regulator; the commitment, signed by our main contact—the finance director, Paul Budge—and myself. So there was a commitment to £10 million a year for 23 years.
Ms Buck
Okay. Sorry, I hadn’t quite understood that that matched as firmly as it did. But 23 years, as you know, is an exceptionally long period for a recovery plan. Was that put to him? Was that something that you discussed—that it was an unusually long recovery period?
Dr Margaret Downes
Of course, yes. The traditional extended length was probably 12 years, maybe 15; 20 would have been looked at in any case, but 23 years was an extremely long time and that was put to him. However, as I said earlier, we had two legs of the valuation already fixed: we had the £10 million a year fixed; and we had the valuation fixed. The only way you can calculate the recovery period is dividing one into the other, and that came to 23 years.
Ms Buck
Was there ever a sense that the company would have preferred a longer period, if it had been able to have one? Was that ever raised?
Dr Margaret Downes
No, that was never discussed.
Ms Buck
So there was never any other bid? The 23 years was just an arithmetical calculation?
Dr Margaret Downes
Precisely.
Chair
So there was a triple lock, Margaret, and it was that if the other two parts of the recovery plan did not work, a deficit of about £230 million, £10 million coming in every year—divide one into the other and we get 23 years.
Dr Margaret Downes
Precisely.
Chair
So that is how the figure came about?
Dr Margaret Downes
It was very simple—it’s the simplest thing.
Chair
Great.
Craig Mackinlay
Margaret, very briefly, you mentioned early on that in your meetings with Sir Philip—I think there were only six in 13 years—that he always focused on the investment strategy of the pension fund, and that was then acted upon. Was that acted upon or was it not acted upon? That, I think, is the question. He made suggestions about investment strategy for the pension fund. Were those suggestions actually acted upon by the trustees? I am trying to get to the influence that he was exercising within the—?
Dr Margaret Downes
They were certainly reviewed and given a lot of attention, but in fact we were on that trajectory anyway. At one stage, it was maybe to invest more in property; we were already substantially into property. Another time, he was interested in corporate bonds and we had a substantial percentage of corporate bonds. So when our adviser and his adviser got together, we agreed that we were already there, but if there was any small adjustment that was worthy of incorporating we would have done that.
Craig Mackinlay
Is it quite normal for the sponsoring employer to have that influence within the pension fund’s investment strategy—?
Dr Margaret Downes
I want to make it quite clear: he did not have influence, because we already had our strategy in place and it would take a lot of persuasion to change that. But there is always in any strategy room for improvement. One never eliminates anyone from a good idea, so if there is some very good idea around and it happened to be coming from Sir Philip, we would certainly have taken that into account.
Craig Mackinlay
Obviously there is no perfect investment strategy—if there were, we would all be sunning ourselves somewhere else—but your successor, Chris Martin, felt that the investment strategy that he acquired from you, when he took up the chairmanship, was slightly more on the risk side than he was comfortable with.
Dr Margaret Downes
And he would be correct there. We had to lean towards more risk in our investment strategy in order that, hopefully—the performance of the past 10 years indicated that that was so—we could reduce the length of time that we had to implement the recovery period.
Jeremy Quin
Margaret, I totally understand the rationale, but that gets into quite dangerous territory of moral hazard. You were in a distressed pension fund environment with a 23-year recovery plan and you were increasing the amount of risk that the portfolio was taking on. I understand the objective, which was higher risk, higher returns, and you shrink the period of time, but there is a point here from your members’ perspective—I am looking at this from the point of view of the PPF rather than of your members. From your members’ perspective, you might be doing the right thing. It was taking a gamble and it might all work out very well for the members; if it did not, they would fall into the PPF and get looked after exactly the same way, whether you had narrowly invested and went insolvent, or whether you had put the entire pension fund on the 3.20 at Doncaster and it hadn’t come in. There is a significant moral hazard issue here, and I wondered if you had considered that. Your successor, recognising the distressed nature of the fund, de-risked the portfolio, but you were of the mindset that you would try to take the risk and narrow that 23 years.
Dr Margaret Downes
Actually, we were de-risking on an ongoing basis; every year, we were de-risking. We were moving towards that in our investment strategy, but we were keen to keep some risk in to help towards the recovery.
Jeremy Quin
I am sorry; I must have misunderstood what you said just previously.
Richard de Dombal
Let me add, to be clear, that in the periods when the company was distressed, we did not increase the risk of the pension fund. We may have de-risked slightly less but the profile was downwards, not upwards, as I think maybe you have understood the earlier comments to be. It is not similar, as you suggest, to putting it on the 3.20 at Newmarket. It was de-risking the profile, which was the advice we were getting from our advisers. We needed to leave a little bit of possibility for some upside or some return better than, say, gilts, to try to recover the gap, not increase the risk and hope for the best—
Jeremy Quin
So the debate was on the speed of the de-risking.
Richard de Dombal
Yes.
Jeremy Quin
While no one would say it is a bad idea to take advice from any quarter, there is clearly an interest from the perspective of the sponsor here, because if you do manage to succeed, then the £10 million a year would be reduced.
Richard de Dombal
Sorry; again, just to be clear, that is advice from our own advisers, Towers Watson, not what the sponsor might have suggested we do. This is—
Jeremy Quin
Yes, but to be equally clear, I wasn’t referring to that. I take that on board, but there was an earlier comment made that you did receive advice from the sponsor as to ideas for the pension fund. I just want reassurance that you as trustees were very clear in your own mind about the conflict that could exist in that situation.
Richard de Dombal
I totally agree with you, Mr Quin. To set the record straight on what Dr Margaret said, when she had meetings with the company, as relayed back to the board of trustees—although we weren’t in the meetings, we obviously heard about what was said—none of the comments were ever to increase the risk, certainly in my tenure. The sponsor might think—as you say, there is more of that moral hazard—“Okay, I’ll be alright because it will go into the PPF.” They were not increasing risk necessarily—they were just views from the sponsor of how he might do it, given his concern about the position of the pension fund. Certainly in my tenure, over the last three years, when it was distressed, everything was moving towards a de-risk, which was accelerated.
Jeremy Quin
A last point to follow on from that question. Siobhan, you mentioned that your role on the Taveta board was to protect shareholders’ interests. I think it encompasses something slightly broader than that.
Siobhan Forey
Yes, I am sure it does.
Jeremy Quin
It is to promote the interests and the success of the company and all its members.
Siobhan Forey
Yes.
Jeremy Quin
I just wonder how much focus Taveta put in its discussions on the pension funds around the group, including the BHS one. With your HR background that must have been a concern to you, that this was on the agenda, and was being discussed.
Siobhan Forey
It is on the agenda, obviously. It is minuted in the Taveta board minutes what conversations happened. I haven’t got details of all of those conversations that have taken place over all of the last four years where I have been on the Taveta board, but obviously the pensions situation is documented and is discussed at the Taveta board meetings.
Jeremy Quin
Including BHS?
Siobhan Forey
Yes, I believe so.
Chair
Margaret, before I go to Richard, to end, I want to get a flavour of your meetings with Sir Philip. Did he ask for all the meetings with you?
Dr Margaret Downes
Yes.
Chair
Here is one of the most successful capitalists in the country. He is coming and giving you advice on investment strategy. We learned from our Monday meeting—we had a huge number of paid advisers and none of them seemed to know anything about what was really going on. The only person who knew anything was the person, on Monday, who hadn’t been paid anything, who had got a total grip of the situation. So Sir Philip comes into the room. He is not being paid anything. He is immensely successful as a business person. How well do you think your advisers and their advice were a safeguard for you against this incredibly successful, powerful person, who made money beyond the dreams of avarice, when he is giving you advice about your investment strategy?
Dr Margaret Downes
Our advisers—this was very important—were independent thinkers. They had independence of mind, as had, I believe, all the trustees. I certainly do. Somebody very powerful and very wealthy does not impact on the professional job we had to do. That independence, together with professionalism, I think saw us through pretty clearly and pretty well.
Richard Graham
Margaret, am I right that you said earlier that you had been a trustee of other pension schemes?
Dr Margaret Downes
Yes.
Richard Graham
You were describing earlier the meetings you had with Sir Philip Green where you described his main focus being on the investments of the BHS scheme. He was full of good ideas, you always took these into account, and those ideas were discussed after your meetings between his and your—the pension scheme’s—advisers. Can you think of any other pension scheme that you served on as a trustee where the owner of the company would have meetings with the chairman of trustees and make investment suggestions to the pension scheme investment?
Dr Margaret Downes
Yes.
Richard Graham
In your experience that is a perfectly normal occurrence?
Dr Margaret Downes
In my experience, in one particular case, the board met with the trustees to discuss the pension funds, and they had ideas.
Chair
Which company was this?
Dr Margaret Downes
Well, if you don’t mind I would just rather not say that.
Richard Graham
So, just to be clear, in your experience it is perfectly normal for the owner of the business, who is not in any way directly involved with the pension scheme, to make investment suggestions to the chairman of trustees?
Dr Margaret Downes
My view would be that, because the pension funds have such an impact on the business itself, on the profitability of the business and on their balance sheet, it would not be unreasonable for the board or an individual to express a view.
Richard Graham
And you always took those views into account, even though earlier you described your investment advisers, Towers Watson, as, in your experience, the best?
Dr Margaret Downes
Yes.
Richard Graham
You also said that the portfolio was consistently de-risking during your time as chairman, but the analysis done for us by our investment adviser suggests that, effectively, the portfolio during the period you were chairman was roughly 60% invested in equities throughout. Is that correct?
Dr Margaret Downes
I think it was about 40%. I’d have to look this up, and I will come back with this. I think we were about 40%—perhaps one of my colleagues will clear this up—in bonds and 40% in equities, and the rest in other investments.
Richard Graham
Okay. Perhaps, Chairman, we could hear about that, but let us assume that the portfolio was, as our investment advisers have suggested, broadly invested 60% in equities, which was the classic balance for many portfolios at that time. During 2007 to 2009, when equity markets tanked, what happened? What happened to the value of the scheme’s investments during that period?
Dr Margaret Downes
Well, 2009 was the bottom of the market and it was an horrific, bad time to have a valuation because with investments falling the liabilities increased.
Richard Graham
So during that period 2008 to 2009, what happened to the value of the assets of the pension scheme?
Dr Margaret Downes
In the ensuing two years, the assets came back—
Richard Graham
No, no. During the period 2007 to 2009, what happened to the value of the assets of the pension scheme?
Dr Margaret Downes
The value of the assets was gradually increasing over those years.
Richard Graham
Chairman, perhaps we could get some written evidence on that. Perhaps the other trustees will remember. Siobhan and Richard, do you remember what happened?
Siobhan Forey
Neither of us was on the board at the time.
Dr Margaret Downes
Let me come back to you with those figures—
Richard Graham
Let’s leave it at that. What I suggest happened is that the value of the assets decreased very sharply, markets plummeted and the investment advice during that time proved spectacularly unsuccessful. You weren’t alone in that, but it did none the less and that was one reason why the triennial valuation was so difficult. Chairman, we can get the facts.
Chair
Richard, will you bring it to a conclusion in a moment?
Richard Graham
I will indeed. Margaret, during your discussions with Paul Budge in particular and the corporate’s commitment to providing £10 million a year of funding over a 23-year period, you chose the phrase that Philip Green appeared to commit to this. In retrospect and looking back now, as you do, not long after you stepped down as chairman, Project Thor was launched and then withdrawn, and at the same time the application was made to the regulator effectively to apply to take the pension scheme into the Pension Protection Fund. Given that, do you think you were misled about the degree of commitment by the corporate?
Dr Margaret Downes
I cannot second-guess whether we were misled. All I know is that we—all the trustees—were totally confident that every effort was being made to revitalise BHS, bring it back to profit and continue the business. We never had any indication that there was any other thinking about the future.
Richard Graham
All the trustees equally believed there was full commitment from the corporate for a recovery plan over the next 23 years?
Dr Margaret Downes
There was never any indication to us, but the trustees can speak for themselves.
Richard Graham
Both the other trustees here today were of course also working with the corporate at that time. Siobhan, you were, and I believe still are, a director of Taveta Investments. At what stage did you realise that that commitment for 23 years simply wasn’t worth the paper it was written on?
Siobhan Forey
The valuation process was ultimately agreed. There was a £10 million contribution over a 23-year period. That was clearly evident, that was submitted to the regulator, that was fully documented, and that is something the trustees agreed with the corporate and absolutely believed in. On Margaret’s point, we did believe in that.
Richard Graham
But you were a director of the company that owned BHS, and when Project Thor was withdrawn and the company put up for sale. Are you saying you didn’t have any idea at all that was going to happen and that therefore the 23-year commitment to refunding the pension scheme was simply a dream?
Siobhan Forey
No. We did not have any idea that that was going to happen. Ultimately, we sat there in 2012 agreeing a valuation, a recovery period and a contribution from the wider group of £10 million a year. That is what we sat there and absolutely agreed.
Richard Graham
As trustees?
Siobhan Forey
As trustees.
Richard Graham
And as Taveta Investments, you absolutely sat round a board and decided to sell BHS?
Siobhan Forey
We did.
Richard Graham
And you did not see any contradiction at all in the fact—
Siobhan Forey
You are talking about a different timeline period. That timeline period was two, three years later on.
Richard Graham
Margaret was chairman until the end of 2013, and she has described that all of you as trustees signed up to this and believed in it.
Siobhan Forey
Absolutely.
Richard Graham
But by the summer of the next year, Project Thor was being withdrawn and an application was being made to the Pensions Regulator about going into the Pension Protection Fund. Does that show a 23-year commitment?
Siobhan Forey
What—
Richard Graham
That is six months later.
Siobhan Forey
There was a different proposal on the table. It was Project Thor that was being proposed, and that was what was on the table. That was being positioned.
Richard de Dombal
Again, as far as I was aware, at that point in time Project Thor was being paused, not withdrawn. I take it that technically it was withdrawn, but with a view to revisiting it in January. I was on the board of the pension scheme throughout 2014 and early 2015. The first I knew that there was a sale was through the discussions from Chris Martin, my then chairman.
Richard Graham
So neither of you see any contradiction at all between believing as trustees that there was a 23-year recovery plan to be funded by BHS and sitting in your case on the board of the holding company, deciding that the business should be sold and therefore that the recovery plan was never going to happen.
Richard de Dombal
If I may, I will add something just in terms of that 23 years. If you are asking whether I, as a professional accountant, looked at the BHS balance sheet and thought, “Well, that is fine for 23 years”, then no, you cannot look at that and say it is a fantastic business. We saw elements of recovery and commitments from the company, but you would have to be pretty optimistic to think, “Oh yes, you are getting that for 23 years.” Returning to Margaret’s point, what we were getting from the wider group, outside of the affordability of BHS, was a commitment to £10 million a year and the maths, as we have explained, means that it is a 23-year recovery. Otherwise, the alternative is that it just goes into the PPF if there is no support from the wider group.
Chair
Siobhan, could you answer? Then we can conclude on this high note.
Siobhan Forey
I agree with Richard’s point. Ultimately, we did an independent covenant review with Baker Tilly. The £10 million was the commitment that was to be received from the wider group. That was what was agreed. Subsequently, Project Thor was tabled as an alternative solution by the company. Those are the facts.
Dr Margaret Downes
Post-December 2013.
Siobhan Forey
Yes.
Dr Margaret Downes
I think that is a very important point that is not coming across.
Chair
You have been really helpful with what has come across. Thank you all very much for coming today. Mr Iain Wright took the Chair. Examination of Witnesses
Witnesses
Stephen Hermer, Partner, Olswang, Andrew Frangos, Chief Executive, Cornhill Capital, and Mark Byers, Head of Advisory, Grant Thornton, gave evidence.
Chair
Gentlemen, thank you for coming in this morning. I understand that Retail Acquisitions Ltd has decided not to waive legal professional privilege in relation to your evidence this morning, but I know that you will try to be helpful to the Committee and provide as much information as you possibly can. Can you start by introducing yourselves and outlining the nature of your role and the nature of the advice that you gave with regard to the sale and acquisition of BHS?
Stephen Hermer
I am Stephen Hermer. I’m the Olswang general counsel and a corporate lawyer by training. The firm was engaged by Retail Acquisitions to provide legal advice in relation to the acquisition.
Andrew Frangos
Hello. My name is Andrew Frangos. I’m the CEO of Cornhill Capital. My firm was engaged by Swiss Rock plc, predominantly to source funding for the company post-acquisition and pre-acquisition.
Mark Byers
Hello. I am Mark Byers. I’m a partner in Grant Thornton; I am head of their advisory services. Grant Thornton’s role in the acquisition of BHS by RAL was limited to providing financial due diligence services for that acquisition.
Chair
When did you start giving advice to Swiss Rock, RAL and Dominic Chappell? When did the gig start?
Stephen Hermer
From our perspective, it started in November 2014.
Andrew Frangos
We were formally engaged in December 2014. There were discussions regarding this potential transaction for possibly 10 months prior to that.
Mark Byers
Yes, I think we attended meetings in November 2014, and we were engaged to begin the due diligence in February 2015.
Chair
How did you get the gig? Were you introduced to the directors by somebody? Was it a tender process? What happened with that introduction to allow you to be commissioned for this advice?
Stephen Hermer
We were asked to make the case, with a number of other law firms, for the mandate.
Chair
Who asked you?
Stephen Hermer
A contact at a law firm whom we knew who I thought was too small—that they thought was too small for the job.
Chair
Which law firm?
Stephen Hermer
I prefer not to give the name publicly; I will be happy to give it to the Committee afterwards.
Chair
Okay.
Andrew Frangos
The relationship initially was with a view to a different transaction, not in the retail space. That client subsequently changed their name to Swiss Rock, and then BHS came on to the agenda.
Chair
But you are a long-standing adviser to the personnel involved. Is that fair to say?
Andrew Frangos
No. I wouldn’t describe us as a long-standing adviser. My business is predominantly a stockbroking business. Dominic Chappell was a stockbroking client—one of thousands—of the firm’s.
Chair
For how long?
Andrew Frangos
I would need to check, but I would estimate maybe six months.
Mark Byers
We were approached by Mark Tasker, who is a partner in a City law firm called Bates Wells Braithwaite. He was also a director of Swiss Rock and RAL. He asked us whether we were interested in undertaking a due diligence exercise on a large retailer—an unnamed retailer at that point. He asked us to provide credentials. We did that and then we attended a meeting to discuss what our approach would be. Then we learnt that they wanted to hire us. I am unaware of whether there was a formal tendering process. We were given the impression there—
Chair
But you were part of that beauty parade.
Mark Byers
Yes.
Chair
When did the advice stop?
Stephen Hermer
From our perspective, when the completion happened on 11 March.
Andrew Frangos
In our case, Retail Acquisitions believed that we were not engaged, so we had a dispute with Retail Acquisitions, given that we were appointed by a parallel vehicle with similar shareholdings and similar directors. Retail Acquisitions did not recognise our engagement.
Mark Byers
Yes, our work was concluded on the acquisition on 11 March.
Chair
In terms of the advice that you provided, who were you dealing with? Was it a team of people? Was it a particular individual you reported to? What was the nature of the advice and where did that go?
Stephen Hermer
Would it be helpful if I explained the nature of the advice that we would give generally in these circumstances, because—
Chair
It would help if you answered my question.
Stephen Hermer
Okay. We would have interfaced with a number of people at the client.
Chair
On this occasion, was it a particular team, a particular individual?
Stephen Hermer
I can’t get into the details of exactly who we interacted with; I’m sorry.
Chair
Okay.
Andrew Frangos
Dominic Chappell was the main contact.
Mark Byers
Our interaction with RAL would have been relatively limited because of the role that we were performing, which was to undertake financial due diligence on BHS and then provide a report that would identify the key risks and issues that RAL would need to consider before they actually acquired BHS. So we were not involved in recommending that they buy BHS; nor were we involved directly in the negotiations—
Chair
But who would your report go to? You will be identifying the key risks. Will it go to the directors?
Mark Byers
The report would go to the board of RAL.
Chair
Okay. Mr Byers, I will start with you. I have worked for an accountancy firm. Due diligence for a new client is an important part of the steps. What due diligence did you undertake for this new client?
Mark Byers
As you will be aware, we have a duty of client confidentiality. RAL has not waived that confidentiality, so I am unable to go into any significant detail in relation to the work, but what I can say is that the scope of the work was extensive in relation to looking at BHS and the key financial issues that BHS faced.
Chair
You were confident that your new client was of reputable character and wouldn’t damage the reputation of your firm?
Mark Byers
When we make a decision to act for a new client we have a formalised, detailed take-on process, and the take-on process that we undertook on RAL and Swiss Rock was a normal take-on process. I have reviewed what happened, and I am satisfied that it was a properly run process.
Chair
Mr Frangos, in terms of due diligence for this commission, what did you do?
Andrew Frangos
The standard anti-money-laundering checks—verification of address, passport and that sort of documentation—rather than any documentation regarding historical activity or expertise.
Chair
So it was purely just to say that this is the person?
Andrew Frangos
Yes.
Richard Graham
Cornhill Capital were doing those checks on Swiss Rock, rather than RAL. Is that correct?
Andrew Frangos
Correct.
Chair
Was this focused purely on Mr Chappell?
Andrew Frangos
I believe that the two directors at the time were Dominic Chappell and Joseph Chappell.
Chair
That is father and son, is it not?
Andrew Frangos
I think so. I didn’t meet the father, so all of our relationship was with Dominic.
Stephen Hermer
Our processes involved doing customer due diligence, and we satisfied our obligation to do that by doing online searches against risk intelligence databases. In cases that seem to be high profile we sometimes do additional searches. The searches that we did here indicated that Mr Chappell had two insolvency-related incidents in his history. We discovered the 2009 bankruptcy and the administration in 2009 of a company of which he had been a director.
Chair
Mr Hermer, I will continue with you but this is a question to you all. In the nature of the due diligence, did the name Paul Sutton come up at all?
Stephen Hermer
It did not, no.
Andrew Frangos
Not in the due diligence, but we had met Paul Sutton prior to meeting Dominic Chappell.
Chair
What was the nature of that introduction and meeting?
Andrew Frangos
Paul Sutton was appointed power of attorney on a stockbroking account that we held, and he introduced a transaction of which Dominic Chappell was the CEO, Containasuite. He was the introducer to Dominic Chappell.
Mark Byers
No, Paul Sutton did not come up, and we had no knowledge of any relationship that Chappell may have had with him.
Chair
May I move on briefly to the nature of your fees? Literally how big a deal was this for your firm? Was it a big transaction? Was it a relatively small one? I am not asking about numbers as such, but I am wondering in terms of the overall scheme of things. How big a deal was it?
Mark Byers
For Grant Thornton the due diligence work was a reasonably-sized fee. It was certainly nowhere near the biggest fee that Grant Thornton would have in due diligence, but it was a meaningful fee.
Chair
It was worth your while to carry this out?
Mark Byers
It was worth our while to carry it out, and it was worth our while to carry it out properly.
Chair
I have been looking on the Grant Thornton website, and there is a document about transactions that the firm have done with regard to M&A and corporate finance—I think it is called “Leading the Way”—in respect of 2015. That was published on 24 February 2016. BHS and Retail Acquisitions Ltd are not mentioned at all. Why is that?
Mark Byers
I am unaware of the part of the website you are referring to.
Chair
This is a good shop window, in terms of good M&A and good corporate finance, and this was—by your own words—a reasonable transaction, but it’s not included in your promotional literature. I just wanted to know why that was the case.
Mark Byers
I can find out why. Was it on there, originally, are you saying, or you weren’t sure whether—?
Chair
There is a document—
Mark Byers
I am happy to give you a written response on that—
Chair
That would be helpful.
Mark Byers
—as to whether it was on previously, and what the reasons were, if we took it off.
Chair
How big a deal was this, Mr Frangos?
Andrew Frangos
We didn’t receive any fees on the transaction. Our fees were all success-based. Had those fees been paid—
Chair
I am sorry to interrupt. So, all contingent upon the actual sale going through?
Andrew Frangos
Yes.
Chair
You have very kindly given us your engagement letter and I just wanted to mention a number of things. There is a success fee on completion—that is, the sale of the business. It also says there is a “2% (two per cent.) fee on all property sales” with regard to this. So, as part of your discussions with Dominic Chappell, was part of the realisation of value coming out of this that a lot—“a lot” is too much of an emotional term—some property disposals could take place and you could be a beneficiary of that? Is that fair?
Andrew Frangos
That was a potential route to them accessing funds for the business, yes.
Chair
Your engagement letter says, “Subject to the completion of the Transaction and the subsequent acquisition of the Arcadia Group”. Now, is that a mistake, or was the intention for Retail Acquisitions Ltd at some point not just to buy BHS but to buy Arcadia?
Andrew Frangos
It was a very ambitious transaction when it came through the front door in the first place as a BHS acquisition. There were lots of different transactions also discussed along the way and the engagement was considered to be a bit of a catch-all, rather than a definition of what was intended.
Chair
I just want to press you on this, as this is important, because Arcadia is a big company. Did Dominic Chappell come in and say, “BHS is good, but it’s only a start. I want to buy Arcadia”?
Andrew Frangos
He indicated that it could go on to do other deals, including other retail brands.
Chair
Thank you. That’s very helpful. The same question to you, Mr Hermer.