The Big Read: The inside story of the BHS schemes' journey to buyout

The story of BHS is one of both outrage and happy endings. James Phillips speaks to trustee chairman Chris Martin and his advisers about the scheme's endgame journey

James Phillips
clock • 25 min read

The story of BHS is one of both outrage and happy endings. James Phillips speaks to trustee chairman Chris Martin and his advisers about the scheme's endgame journey.

"Project Thor's a bit like a butterfly's wings; everything then follows on from that."

Chris Martin's invocation of the Butterfly Effect to describe the journey of the BHS pension scheme illustrates the perilous and long-winded saga faced by its trustees and members.

As trustee chairman of the scheme, he has been through the thick and thin of perhaps the best-documented pensions story of all time.

Since the high street icon's collapse in 2016, key players in the epic have been paraded in the press, parliament, and the penal system.

Now the shop's name is almost synonymous with distrust in the pensions industry. But in one sense the outcome for members is a positive one.

While they may not receive the full entitlement they would have had BHS continued, their benefits are now extremely secure and there are no more bumps in the road left.

Martin and his advisers — Eversheds Sutherland partner Emma King and Barnett Waddingham partner Ben Pullen — describe the four-year journey to buyout that kicked off when funding negotiations stalled in 2014..

The history of BHS


ormed in 1928 by a group of American entrepreneurs, British Home Stores had become a landmark of the British high street by the time of its collapse in 2016.

Although it climbed from strength to strength, including going public in 1933, the stalwart retailer was doomed to the same fate as the counterpart it tried to emulate the success of: Woolworths.

The shop has a chequered history — renaming itself and switching between public and private — as it changed hands, eventually becoming part of Sir Philip Green's empire in 2000 at a cost of £200m, joining Arcadia two years later.

By 2016 it had grown to 163 UK-based stores with 74 further stores across 18 territories overseas.

When Green took over the business in 2000, the scheme had a healthy surplus of £43m on an actuarial basis. By 2006, funding had deteriorated to a £7.3m deficit and by the 2012 triennial valuation — albeit hit by the financial crisis — the deficit was recorded at £232.5m, or £514.5m on a buyout basis.

The deterioration came despite the scheme's closure to both new members and future accrual, and as Green had extracted a record-breaking £1.2bn dividend.

Sunday Times city editor Oliver Shah explains in his book on Green and the collapsed firm, Damaged Goods: "The BHS pension deficit was hanging around Green's neck like a lead weight", and that Green told Deloitte insolvency practitioner Neville Khan, "he needed to get rid of it". 

Project Thor


arning flags were beginning to show for the business and its pension schemes in early 2014 when Deloitte presented ‘Project Thor' — a plan to reduce the pension exposure to the company by cutting members' benefits to barely above those offered by Pension Protection Fund (PPF) compensation.

Under the plan, members with pension pots valued at less than £18,000 would be encouraged to take cash lump sums — a proposal that would lead The Pensions Regulator (TPR) to later mention the words ‘moral hazard'.

Martin, who had been appointed trustee chairman in January, learned of the plan in the same month, then shared it with the rest of the trustees a week later.

"This was an innovative proposal to create a new scheme and to bulk transfer members to that new scheme with lower benefits but, critically, for the sponsoring employer to continue to provide some covenant support."

But the proposal was flawed; it had insurmountable hurdles and was effectively doomed from the start. Bulk transfers resulting in lower benefit entitlements require consent from each individual member — and it was highly likely that the richest members would benefit the most.

This was an innovative proposal to create a new scheme and to bulk transfer members — Chris Martin

And BHS was being pressed to put in additional money; the trustees were requesting an amount Green would not agree to.

Although the company, the trustees and TPR pressed ahead with looking at the detail of the proposal, this then stalled in summer 2014. The company was seeking to understand its performance at Christmas — a season that starts in the summer for retailers — as well as political risks arising from the Scottish independence referendum and the tension between Russia and Ukraine over the annexation of Crimea.

Discussions went quiet until the start of the following year, when the company "re-engaged" with the trustees on the project, first floating the idea of the sale of the company.

"They started talking to us again about what might be possible and, in particular, they were looking at a sale of BHS at that point — a solvent sale," Martin explains.  

Dominic Chappell gives evidence on BHS to MPs | Credit: UK Parliament

Sale to Retail Acquisitions


espite this, the trustees had very little indication of what was in store. Martin explains that in early 2015, while there was "radio silence" from the company, they were conscious of "mutterings in the press" about a potential sale.

"We pushed the company very hard as to what was going on" but to no avail, he states.

And then, it happened. For just £1, BHS was bought by Retail Acquisitions Limited (RAL) and three-times bankrupt Dominic Chappell. Shah writes that Chappell actually "jauntily gave Green £2, ‘just so he could show a profit'."

The process is distinctly a sore point for Martin: "It was a slightly unsatisfactory process backwards and forwards but eventually we were advised that BHS had been sold to a company then known as Retail Acquisitions."

Trustees' powers to get information from their sponsor is extremely limited — something noted by both MPs and Martin during his 2016 select committee appearances.

"We don't have information powers that compel the company to tell us what was going on," he says. "We were given information when it suited, but not when it didn't suit. So the sale was completed without us having any real visibility."

The Arcadia troops in the pensions team were good as gold and worked and continued working in the most difficult circumstances — Chris Martin

This made it nigh on impossible for the scheme or its advisers to conduct any due diligence on the sale — and clearance was not sought with TPR. The sale just happened and the trustees were left to deal with the consequences.

As Shah notes in his book, Chappell did not understand the "nature of the teetering liabilities he was about to take on" — an assessment Martin agrees with.

"The Arcadia troops in the pensions team were good as gold and worked and continued working in the most difficult circumstances to make sure members carried on getting their benefits and service they expected.

"The difficulty was more around the fact that BHS was now owned by a group of people [RAL] who had very little experience in retail let alone in the issues relating to managing pensions schemes. They were slightly in denial about the parlous state of BHS and didn't want to acknowledge how bad it was. They were just sort of putting their heads in the sand."

Project Vera


he sale had no effect on the difficulties facing the pension scheme, however. Noting it is "a bid odd" in hindsight, Martin says everything continued as business as usual. While there was a new owner, the business was still trading.

But the parties involved in discussions on funding the pension scheme changed and, with this, came a new plan to fix the deficit.

"It was apparent from one all-parties meeting that they still weren't going to be able to make the maths work in terms of paying sufficient deficit repair contributions to fully fund the schemes," he says.

‘Project Vera' emerged onto the scene but, as it was largely the same as Thor, it ran into the same problems. No new scheme structure could work without greater finance from the company.

We'd always known that this could probably crash and burn but by that point the traffic lights were very much flashing red — Chris Martin

"It was very clear that Vera wasn't going to work because there was no capital being put in to support the new scheme," Martin says. "You have lower benefits in the new scheme, but it still wouldn't be affordable."

Then the situation got worse as trading slowed and the chances of securing further funds from BHS diminished. It was time for the trustees and their advisers to begin thinking of other options.

"By December 2015 it was pretty clear that trading wasn't great, so there was no new capital and no solution to the pensions issue.

"We'd always known this could probably crash and burn but by that point the traffic lights were very much flashing red and we mobilised — including getting Barnett Waddingham involved — into the process of saying ‘right, we need to do some serious contingency planning here'."

BHS trustee chairman Chris Martin

Contingency planning


hat contingency planning began in earnest; the scheme needed to be ready to ensure continuity of payments and service in the case of an employer insolvency.

But, with more than 20,000 members whose records were held by an in-house administration team, this was a huge task.

Barnett Waddingham's Pullen explains "remedial conversations" began, but problems continued to exist in terms of accessing some of the necessary data.

"We were trying very hard to get the company to open up and let us come in and understand the operation better. We knew there was an in-house administration team that was meeting the scheme and had been since 2000."

The primary focus was on ensuring members continued to get pensions paid, noting the possibility that there could be an event where there would not be enough assets liquidly available, the company's bank accounts were frozen, or there was nobody to "press the button" to run payroll.

In addition, the in-house team had no experience with transferring data to third-party administrators.

"Where there is going to be a transfer, you get hold of all the records and legacy information of how the scheme has been administered over the years."

But "the only way to get the data properly was to come in," Pullen says.

Part of the difficulty here was that non-disclosure agreements (NDAs) and data-sharing protocols needed to be approved — BHS pensions data had not been transferred to RAL by Arcadia, and so was still held by another company.

Eversheds Sutherland's King explains: "A complicating factor here was that the Arcadia in-house pensions team was a shared resource. While BHS had been sold, there was a transitional period during which BHS was still accessing the shared Arcadia resource. A lot of these people — the pensions manager in particular — were employees of Arcadia rather than BHS.

"From a legal perspective, that was another quirk and additional difficulty because we had to put in place legal agreements around data sharing etc."

Yet, RAL was seemingly refusing to acknowledge the difficulties facing the scheme, and the pace of work was frustrated, despite intervention by TPR, which had launched a formal investigation after the sale.

"In their [RAL's] world, insolvency wasn't going to happen: ‘Why are you planning for something when it's not necessary to do so?'" Martin recalls.

It's not unusual to have this sort of disconnect. The business is focused on trying to save the business. But we're coming at it from a different angle — Emma King

"It was quite a bizarre backdrop, to be honest, because we were all involved in active discussions with the PPF and TPR about what might happen. But this group of people is saying, ‘no, no, business as usual. You don't need the information from the pensions team because PPF assessment isn't going to happen'."

However, these competing assessments of the pension trustees and the sponsoring business is not an unfamiliar situation, King notes.

"It's not unusual to have this sort of disconnect," she says. "The business and those who are in the business are focused on trying to save it. But we're coming at it from a different angle [with] different questions. We're just kicking the tyres and looking at worst-case scenarios."


Eversheds Sutherland partner Emma King

PPF assessment


hile the extreme interest and focus on pensions began later, members' hardship started in March 2016 when the business filed a company voluntary arrangement (CVA), which in turn triggered a PPF assessment period.

At this point it was key for the trustees and their advisers to communicate with members and alleviate any concerns — many had not heard of the PPF by this point.

"We got the announcement out reasonably quickly and, at that point, we had set up a helpline so that our team dealing with that PPF process could take member calls," Pullen explains.

The lack of profile, due to low media interest, aided this. The ability to get a clear message to members without competing for airwaves with sometimes "unhelpful" media reporting meant their messages were not diluted and allowed for some early preparation.

So by the time the firm went into administration a month later, members had had that message drilled into them.

Martin explains: "We were very focused on the fact that the PPF provides valuable compensation where a materially underfunded defined benefit (DB) scheme sponsor goes into insolvency. It was more around the positives: the PPF will continue to pay your benefits.

"It was at the point of the CVA that we needed to send that message. The rest of the world missed the point that the CVA was significant for the scheme but not for the business. It allowed the business to carry on.

"We had a month where we could get the pensions message out in a steady, dull, but comforting, way to members. We just distanced ourselves from the rest of the noise that happened."

This involved messaging via post, email, and a website, alongside a dedicated phone helpline.

Of course, this did not eliminate all messages from angry or confused members when the administration event happened, but it did mitigate any adverse reaction.

Pullen notes there were "emotive messages" coming via the phone and he recalls there was a "big spike" of phone calls the day after the administration had hit the 10 o'clock news.

"Members were angry and a lot of the media reporting I don't think had helped with that. But through the calls, by and large, members got the understanding that their pension was not significantly at risk as reported in some of the papers."

Sir Philip Green holds up his chequebook when telling MPs about failed attempts to sell BHS | Credit: UK Parliament

Political pariah


he shop's profile drew intense scrutiny across the board, but no-one was more a formidable opponent of Green's than Work and Pensions Committee (WPC) chairman Frank Field. Field took it upon himself to engage in a war of words with Green, a campaign that often descended into personal attacks in both directions.

Indeed, these political skirmishes illustrate best the BHS process. Most of those familiar with the case will conjure up one particular image: Sir Philip Green brandishing his cheque book in an oral evidence session of a joint session of the WPC and Business, Innovation and Skills Committee.

The appearances, particularly Green's six-hour, 600-question epic on 15 June 2016, were iconic, with Green boldly declaring the pension situation was "resolvable and sortable".

"We will sort it and we will find a solution. I want to give an assurance to the 20,000 pensioners — I am there to sort this in the correct way."

The evidence given by the trustees was quite extensive too. They waived legal privilege to ensure a full and open inquiry in a bid to reassure members that they were doing everything in their power to get a desirable result.

King explains: "We took the view very early on that, actually, it would be in members' best interests to be as open and transparent with the committee as possible, because their interests were aligned. If the select committee did its job properly, that actually meant members' outcomes were more likely to be better than if we were to be neutral.

"We were never going to cause difficulties for the investigation but actually wholeheartedly support it. The consequence of that waived legal privilege was Chris and I were able to be very transparent in the answers we gave in the hearing, but also the information and material we supplied to the committee."

King says this also made it easier to help the committee wade through a huge bank of material, signposting to what they believed was the most relevant, and allowing those watching to see the trustees being helpful and on members' sides.

Sir Philip Green pledges to "sort" out the pensions issue

In that parliamentary committee room — an amphitheatre where witnesses often find their reputations hanged, drawn and quartered — progress was made, but the process was at some points perhaps unfair and a hindrance.

For Martin, "the jury is out" — there were both positive and negative results.

"There were times when it was really good and the fact that Sir Philip had to attend the select committee and was put in that position, the select committee's work was absolutely outstanding and led to the ‘I'm gonna sort it' comment, so you couldn't fault them for that.'

"But there were times before and after the select committee where MPs would make comments in the press and appear on TV, which would take us one step forward and three steps back. Particularly, if you're dealing with quite volatile characters.

"The committee was a great galvanising point to get discussions going but sometimes politicians just need to allow the key players to then get on with it themselves. Occasionally, comments were made that just drew things to a halt for days on end because people were retrenching their positions."

King agrees, believing the appearances "created a head of steam" allowing the parties to demonstrate progress, but that some parts acted as a blockade to talks.

"Some of it was unhelpful, particularly some of the personal antipathy involved, because it got very personal and there was a lot of emotion involved, which could be unhelpful and distracting."

Barnett Waddingham partner Ben Pullen

Reassuring members


t was events like these that meant, throughout the process, member communications were a central part of the trustees' and advisers' strategy to reduce concerns, explain the PPF protection at hand, and wave away sometimes spurious media reporting.

Pullen explains that a delay in media reporting after the CVA meant concerns over the "infamous £571m black hole", for example, were headed off early thanks to an accelerated timetable of contingency planning.

"We put quite a lot of effort into the communications that had gone out to members," he says. "Because we had been able to start when we did, at least at that point the administration had all sort of moved and bedded over and we were in a position to work with that."

We knew that a chunk of those members were now going to phone the next day asking where their Sir Philip bonus was and what that means - Ben Pullen

There were at least two prongs to the communication campaign: keep members informed while battling misinformation in the press, whether that was accidental or hyperbole.

Furthermore, Martin was keen not to descend into character assassinations of Green or anything that might have stoked the fire. He had a clear and "consciously" developed strategy for dealing with the press.

"Our strategy was to avoid gossiping about the business and about Sir Philip and Dominic Chappell etc and just talk about pensions," he states. "So whenever I did press interviews, I would be reassuringly boring and talk about PPF compensation and the continuity of benefits for members.

"That wasn't by coincidence. It was a clear communication strategy."

When the images of Green with his chequebook permeated the news channels, Martin and his advisers immediately began to prepare for an onslaught of phone calls from members.

Pullen explains: "We watched that live, knowing it would be reported in the news that evening and that a chunk of those members would phone the next day asking where their Sir Philip bonus is and what that means.

"We had to respond that afternoon."

This involved bringing the administration team up to speed with all the developments as well as the "usual wrinkles and issues" that come from a scheme being in PPF assessment — essentially comforting members that, whatever happens with regards to a settlement, a certain amount of benefits would always be protected.

Theresa May's decision to hold a snap general election in 2017 caused unexpected problems for the BHS scheme

New scheme


ltimately, Green's appearance before MPs and vilification by a press demanding he be stripped of his knighthood, alongside TPR's regulatory intervention, arguably led the billionaire to put aside £363m for the pensions of his former workers.

Now that a settlement had been reached, it was time for the trustees and their advisers to press ahead with creating a solution: a sponsorless scheme.

We were hamstrung by the fact that Theresa May announced her surprise general election - Emma King

Yet there was no legislative framework to allow for this to happen. While certain benefits could be transferred, some more complex elements needed something new. 

King explains: "To get this to work, we actually needed a change in the legislation. At the time we couldn't transfer any benefits in payment; that included contracted-out benefits, guaranteed minimum pensions (GMPs), and 9(2B) rights. We couldn't transfer those into a brand new scheme because the legislation hadn't caught up to the end of contracting out."

The government was convinced to create a bespoke solution ring-fenced to apply only to the BHS scheme and British Steel.

But one snap general election got in the way. Theresa May's announcement put a big spanner in the works for the innovative plan with civil servants and all government business almost immediately going into a period of purdah for six weeks.

"We were hamstrung by the fact that, just as we were about to start the consultation on that, which was going to be done in a very short timeframe, Theresa May announced her surprise general election," King continues.

"Nothing could happen, and, of course, we'd already gone out to members telling them we were going to be setting up this new scheme and their benefits were going to be transferred. We were really up against it in a challenge to get that legally capable of happening because of this tranche of time taken out from a parliamentary perspective."

The possibility that the law may not have been passed despite members being told of the imminent move was "unpalatable to say the least", King says, but with a Conservative government, albeit diminished, returned, the change was progressed.

Explainer: 9(2B) rights

Section 9(2B) rights are similar to GMPs, and replaced them when accrual ended on 5 April 1997. The name refers to the section of the Pension Schemes Act 1993, which made provision for benefits accrued from contracting out of the earnings-related state pension, or state second pension.

Such benefits had to pass the so-called reference test (until its abolition on 6 April 2016), and those in payment could only be transferred to schemes that had also previously contracted-out. This caused problems when attempting to transfer members to the new BHS scheme, as that scheme had obviously not had this provision in the past.

The government introduced an amendment to law to allow for this transfer to take place in two specific circumstances — BHS and British Steel — subject to certain conditions.

Hence the levy for schemes without a substantive sponsor was born, using the pricing model for put options as a basis for the cost.

One option that emerged since the settlement, however, could have provided another solution for the BHS scheme: consolidation.

Since the government's DB white paper, published last March, two commercial consolidation vehicles have entered the market — Clara and The Pension Superfund — and Martin insists the trustees would have considered such a route.

"Had it existed, it would have been an alternative option," he says. "As a potential exit vehicle, we absolutely would have thought about it. It potentially would have offered us some covenant protection we didn't have. It could have changed the economics of the settlement."

Choosing this option would have depended upon finding "that optimal sweet spot".

"These members have been through the most public and pretty unpleasant journey. Lots of them have lost their jobs, all of them had some reduction to their pension benefits, and everything had been played out in the press and in parliament in the most unpleasant way.

"I don't think we would ever have contemplated an outcome for them that allowed as material a risk to happen again. The basis we ended up agreeing for the sponsorless scheme was very prudent and very conservative, specifically for that reason — that we couldn't, at a human level, put people through that again."

Members were given a choice: take a lump sum, transfer to BHS2, or enter the PPF. Of the 18,417 in the main scheme, 8,965 were offered a chance to take either a winding-up lump sum or a trivial commutation lump sum death benefit; 80% of them opted for this.

Another 9,105 were transferred to the new scheme and 501 chose to enter the PPF; the remaining 1,674 did not answer, and were automatically moved to the PPF.



egardless of the choice made, the BHS journey came to an abrupt end in August last year, when the new scheme secured a significant £800m buyout deal with Pension Insurance Corporation (PIC).

In a record-breaking year for the bulk annuity market, BHS2's was one of the most standout deals — and while it did not guarantee the exact benefits of the original scheme, members received security and a higher entitlement than if they had moved into the PPF.

Even more remarkably, the deal was completed far ahead of expectations. When the scheme was launched, a modest investment strategy aiming for safe but consistent returns was designed to help achieve the goal within five to 10 years.

In actuality, the £363m payment meant this was in fact doable within 12 months, much to the surprise of the trustees.

"When we agreed to the settlement, we didn't anticipate we'd be anywhere near being able to secure benefits on a buyout basis so quickly," Martin says. "Indeed, we had a time horizon of something like five to 10 years in our minds.

"But we decided at an early stage that, as part of setting the investment strategy, we ought to just sense check where the insurance market was at."

Martin was aware that insurance appetite and prices differ widely and can change quickly.

"We were genuinely surprised by the results, and one response was ‘oh, actually, we think you're probably fully funded on a buyout basis', which really quite surprised us in a very positive way.

"We'd only gone out indicatively just to see how far away we were but then had to run a full process, accelerated, just to make sure there were no other insurers that could come in. Nobody was matching PIC at that time in terms of their appetite or pricing."

The accelerated process saw the trustees, PIC and their advisers beavering away to lock down the price, negotiate contracts and get assets into place to conclude the deal as quickly as possible.

For King, the speed was "astounding".

"It was quick — really quick. We had to throw resource at it, but it helped that we'd got an in-house specialist buyout team who were very familiar with the process and PIC."

Pullen agrees, adding it was a surprise despite his firm bringing in the "best of our buyout guys".

"There was obviously a unique position for the buyout in that there was no sponsor so no additional tab — you can't reach the end and be short by £10m and get a cheque from the employer," he continues.

"We had to have PIC coming in and providing all risk cover. That was a team effort between all the advisers and, even internally, a mix of pulling together the administration teams that had worked on the scheme's assessment with the teams actually running the administration."



ltimately, the buyout process was completed fairly quickly and those members who opted to transfer to the new scheme are now enjoying guaranteed income for their retirement at above levels offered by the PPF.

While the journey was fraught and horrific for many involved, and many members will have lost their jobs and certainly seen their benefits reduced, it has served as a useful reminder of the role of the regulator, the power of reputational risk, and the service trustees must provide their members.

The members have got to a point of certainty they absolutely deserve given what they've been through - Chris Martin

Regulatory action appears far from over, however — Chappell is still being chased to put around £10m of funding into the scheme and also faces disqualification from being a director.

But Martin, his fellow trustees, and, most importantly, scheme members, can rest easy knowing further BHS pension woes are unlikely to befall them.

"From the trustees' perspective, it's an outcome that, at some of the lowest points of the journey, we couldn't have expected or hoped for," he says. "It's been great working with everyone to get to this point and the advisory team has been a dream to work with.

"Most importantly, the members have got to a point of certainty that they absolutely deserve given what they've been through."

James Phillips
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James Phillips

Professional Pensions journalist from 2016-2022

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