Mark Carney has just made Sir Philip Green’s life even more difficult. The retail tycoon’s bid to bail out the BHS pension scheme, and hold on to his knighthood, could have soared to more than £700m after the Bank of England governor presided over a cut in interest rates last week.
Adding to the pressure, the Bank also pumped more cash into the UK economy in a move that hit gilt yields – the return on government debt.
The cut in borrowing costs to 0.25%, combined with a new round of quantitative easing, sent gilt yields crashing to a new low. This could add another 7% to pension scheme deficits, according to consultancy Hymans Robertson, which would add nearly £50m to the BHS bill.
In order to ensure that members of BHS’s schemes receive full pension benefits, Green’s total bill could now be about £717m, valued by the most pessimistic measure which includes the cost of an insurance company taking on the scheme’s liabilities. The last official measure of the deficit showed it was £571m.
Green, who sold BHS for £1 to the formerly bankrupt Dominic Chappell about a year before the retailer went into administration, remains on the hook for bailing out the collapsed chain’s pension deficit because regulators have powers to pursue former owners.
The fiery entrepreneur is also battling to rescue his reputation, as he has been widely criticised for selling on the business with a huge pension deficit and leaving the incomes of more than 20,000 pensioners at risk.
When BHS went into administration, the pension scheme automatically fell under the auspices of the Pension Protection Fund (PPF), which is funded by levies on company pension schemes.
A plunge in the value of gilt yields after the EU referendum contributed to a near-19% rise in the average value of pension deficits controlled by the PPF between February and June. That suggests a rise of about £100m for the BHS scheme’s maximum deficit, taking it to £670m. Last week’s action by the Bank of England has sent it soaring again.
However, Green is unlikely to have to stump up the new total of £717m.
Appearing before a parliamentary inquiry into the demise of BHS last month, Green said he would “sort” the pension deficit. He expressed a determination to offer BHS pensioners more than they would have got under the PPF’s lifeboat scheme, which trims future benefits by 10%.
Offering the same as the PPF would cost Green about £350m at present gilt yield returns, and this is likely to be his starting point. He is expected to try to offset this bill by offering to buy out those BHS pensioners who have pension pots of £18,000 or less – about 17,000 people. They would get the benefit of cash in their hands which they can invest elsewhere, and the cost to Green would be less than the long-term cost of servicing their pension terms.
It’s not clear how much offering these so-called “wind-up lump sums” might cut the total bill by, but it could be at least £100m.
Buying out some of the company’s pensioners would still leave the question of how to serve those wishing to remain in a scheme. Green’s advisers are thought to have proposed the bulk transfer of members to a new scheme linked to a shell company, a financial vehicle that would underpin future pension payments.
However, the PPF has previously signalled its distaste for such structures and is unlikely to support such a proposal. In a response to a public consultation on handling of the pension schemes linked to ailing firm Tata Steel, the PPF said it was concerned that “in the absence of a genuine sponsoring employer, PPF levy-payers would be directly underwriting the risk of the existing or new scheme’s investment strategy failing”.
Green’s Arcadia group, which owns Topshop and Dorothy Perkins, could potentially be lined up as a sponsor. But this is problematic because the company is already dealing with its own pension deficit, last valued at nearly £190m. It is difficult to see how Arcadia’s board would approve such a move. Topshop, Arcadia’s most prized asset, is also 25%-owned by private equity firm Leonard Green, further complicating the group’s involvement.
A spokesman for Arcadia has previously said: “The Arcadia pension fund is well funded and well run. The deficit has widened in the past two years, as it has in almost all occupational schemes, but is still modest in the context of a company that makes £240m a year and has no debt at the operating level.”
Arcadia pays about £25m a year into the scheme, which the company’s spokesman said was “ample given the size of the deficit”.
Ultimately, a settlement is likely to hinge on Green securing a pragmatic deal with the Pensions Regulator. The watchdog has powers to pursue interested parties for money which it deems have been extracted from a company to the detriment of a pension fund.
It is not just the Green family that could be pursued as the former controlling party of BHS. Their Arcadia group and the directors of Dominic Chappell’s Retail Acquisitions, the group that bought BHS for £1 just over a year before it went bust, could also come under pressure.
The regulator will want to avoid lengthy and costly legal battles as it seeks a solution. But the size of the problem, for all concerned, just got bigger.
What Green could sell off
Sir Philip Green has said he is making “real progress” in talks with regulators about a bailout for the BHS pension scheme.
However, even if the tycoon does reach a deal with the Pensions Regulator to resolve the shortfall in BHS pensions, which now could be as much as £717m, there are questions about how he will raise the cash.
Even for a billionaire, raising hundreds of millions in cash quickly is not straightforward. Green and his family are estimated to be worth £3.5bn, according to the latest Sunday Times Rich List. However, Green may have to sell assets to raise the money for the pension scheme.
Here is a list of main assets in the family empire and where the tycoon might turn to solve the BHS pensions scandal.
Arcadia
Green’s main retail business – Arcadia – owns Burton, Dorothy Perkins, Evans, Miss Selfridge, Wallis, Outfit and 75% of Topshop and Topman. The latest accounts for Taveta Investments, Green’s main investment company and the ultimate parent of Arcadia, show that in the year to 29 August 2015 it generated sales of £2.4bn and pre-tax profits of £151m, up from £118m the previous year. If you value Arcadia at the same price-to-earnings ratio as its listed high street rivals, such as Marks & Spencer, then it is worth around £1.75bn.
However, some of the company’s brands, such as Burton, appear in desperate need of significant investment. The BHS saga may also have dampened the appetite of others in the retail industry to do business with Green. One senior retail source said: “Who is going to buy anything off PG at the moment given the scrutiny that Dominic Chappell came under? ... The guys who have the money to do this are not going to give him the price he needs to get out of trouble.”
Topshop
The US private equity firm Leonard Green & Partners bought a 25% stake in Topshop for £350m in 2012, giving the brand a value of £1.4bn. Green could further sell down his stake in Topshop, although some analysts believe it could now be worth less. Analysing the strength of Topshop is difficult because its operations are closely linked with the rest of the Arcadia empire. Topshop/Topman Ltd increased sales marginally from £999m to £1bn last year, with pre-tax profits rising £108m to £113m. However, the accounts for Arcadia Group (USA) suggest that Topshop’s expansion in the US has not been straightforward: it recorded a loss of £13m in the last financial year.
Nonetheless, Topshop appears to remain extremely valuable to Arcadia and Green. As part of the Leonard Green deal and the movement of Topshop’s assets and brand outside Arcadia, Topshop issued a £600m loan note to Arcadia. In the last financial year Topshop paid Arcadia £52.5m in relation to the loan note, including £27.5m in interest.
Cash
Green’s wife Lady (Tina) Green, pictured, collected a £1.2bn dividend from Arcadia in 2005, the biggest in corporate history, as well as the majority of the £586m that was paid out of BHS in dividends, interest and rent when the family owned the retailer between 2000 and 2015. The family received another £53m windfall last year when Arcadia bought BHS’s headquarters from Lady Green, as well as £70m from selling BHS store sites back to BHS as part of Dominic Chappell’s controversial takeover.
Furthermore, the parliamentary report in the collapse of BHS claims Lady Green receives payments from a loan that Taveta used to buy BHS in 2009 as part of a group restructuring. Last year Lady Green collected £8.3m in interest and £20m from an annual repayment of the loan.
Property
Taveta owns freehold, long leasehold and short leasehold property worth £552m, according to its 2015 accounts. However, this now looks a conservative estimate. Sources believe that Topshop’s flagship store on Oxford Street in London – the jewel in the crown of Green’s property portfolio – could be worth £500m on its own. There have been rumours for years in the gossipy world of West End property that Green – who owns the building through a company called Redcastle (214 Oxford Street) Ltd – could sell it. Any sale could allow the tycoon to raise the funds to deal with the BHS pension without any impact on his day-to-day business.
Other
In the words of the MPs who investigated the demise of the BHS, Green operates behind a “complex web of companies, many registered offshore”. Thus, it is difficult to establish how many other foreign vehicles are owned by Green and Lady Green. However, other assets include Shelton Capital, which owns 22% of online fashion retailer MySale, which is worth almost £30m, as well as an apartment in Monaco worth an estimated £20m and the family’s new yacht, Lionheart, which cost as much as £100m.
