HomeAnalysisWhat Zim can learn from the Green, BHS pension debacle

What Zim can learn from the Green, BHS pension debacle

The vote by the British parliament to strip multi-billionaire Philip Green of his knighthood is not only historic but rather shows that the parliament is awake and making all efforts to serve the interests of the people. It shows the need for parliamentarians across the political divide to unite when there is a common agenda of serving the interests of a citizenry. The decision was unanimous.

Daniel Ngwira,Chartered Accountant

The British parliament does not have the power to strip anyone of a knighthood. However, the vote is quite symbolic and it is a recommendation to the responsible committee which has the authority to confer or remove knighthood.
A knighthood is an honour granted by the monarch to someone who is seen to have served the country with heart and distinction. For men it comes with the title “Sir”. If the committee upholds parliament’s decision to strip Green of the knighthood, he will stop using the title “Sir”.

This is a huge embarrassment to the Greens, ranked fourth richest in the United Kingdom. He will enter the history books as the first British citizen to have parliament unite and vote for him to lose the honour which he has held for no more than a decade.
This decision comes as a result of the collapse of BHS Limited, a home retail giant which was owned by Philip Green for over a decade. The collapse of that company has exposed a pension deficit of close to US$1 billion. A total 20 000 employees (past and current) would be affected. BHS employed 11 000 employees.

BHS operated a defined benefit scheme. In Zimbabwe post-2000, a lot of companies migrated into the defined contribution. It is simple and presents less risk to the employer. Even the accounting of this plan in the books of a company is simple. When an employer pays his contribution, he has no further obligations to the fund.

What is peculiar in the case of BHS is that the company went under and that Green had sold the firm in March 2015 for one pound despite having bought it for US$300 million. As the Pension Protection Fund (PPF) would need to cover the deficit of US$900 million, this attracted the British parliament, thereby triggering an investigation into the sale and subsequent fall of the company.

In addition, the number of members involved from both current and past employees was a staggering 20 000.

The report presented to the House of Commons on the affairs of BHS shows that the fund deficit would entail pension pay-out reductions of up to 77%. The report points out that the Green family “became incredibly wealthy, partly on the back of BHS, but in doing so reduced the capacity of the company to invest and succeed”.

From the report, it is clear that the House of Commons was not amused by the findings that the BHS pension deficit would need to be covered by the PPF which collects levies on 6 000 other defined benefit schemes with a membership of 11 million. Of the 6 000 schemes, 2 000 have each membership of less than 100. In essence the smaller schemes would be financing the recklessness in the big fallen fund. Parliament was further unhappy that the fall of BHS would affect several suppliers who depended on it in addition to employees. They got evidence from one 56-year-old Mrs Patel who had only worked for BHS since leaving school. The effects on her, like many other employees, were devastating.

The Zimbabwean parliament should move in this direction of investigating matters and causing action to be taken against offenders regardless of their influence in society.

BHS paid dividends in excess of profits. In periods 2002-04, BHS paid dividends amounting to £414 million (US$176 million) against after tax profits of £208 million (US$254 million). The Green family received £307 million (US$375 million) of this. The report notes that “this effectively removed value from the company, precluding its use for purposes such as investment or pension contributions. While BHS was not alone in this period in paying dividends in excess of profits, the scale of the payments was proportionately far higher as a percentage of net profits than key competitors”.

A combination of losses and high dividend payouts under Green’s watch milked the company to a position of weakness between the years 2000 and 2014. By 2014, the company was now on life support living at the mercy of £250 million (US$305 million) debts from the Green family companies. All the accumulated reserves had been drawn down to negative £323 million (US$394 million) from a high of £229 million (US$280 million) in 2000.

The report found out that Green did not invest enough to maintain the value of the business and that during the early profitable years of BHS ownership, his family accumulated incredible wealth. Further, during that period, more money left the company than was invested. Thus the decision to sell the business was premised on inside knowledge that the company had been run down and under.

The report demonstrates that investigators were applying their minds in an effort to protect the vulnerable.

This scenario is common with some pension funds in Zimbabwe. There have been cases where pension contributions are not remitted despite deductions being made from staff. The overbearing influence of Green made it difficult for the deficit to be redressed.

The report concludes that: “When Sir Philip Green bought BHS, the pension schemes for which he became responsible were in surplus. As these schemes declined into substantial and unsustainable deficit, he and his directors repeatedly resisted requests from trustees for higher contributions. Such contributions were not charitable donations: they were the means of the employer meeting its obligations for deferred pay. We reject any assertion that Sir Philip was not aware of the growth of the deficit: he had a responsibility to be aware and he was aware.

That there is a massive deficit is ultimately Sir Philip Green’s responsibility.”

In Zimbabwe, we have seen key shareholders pleading ignorance when things go wrong, despite there being overwhelming evidence that they knew and they operated like executives.

Quite aware of his responsibility, Green has committed to covering the deficit without involving the British government. Even if he does not do so, the PPF can still follow him up to do the necessary. He has, however, decided not to be followed through but rather to do his part which he should have done way before the collapse of the company.

Shareholders and directors of Zimbabwean banks who ran down the institutions by siphoning depositors’ funds to personal use should make good the losses or be forced to do so by law. The action by Marnet Mpofu, the Insurance and Pension Commission boss of “conducting an on-site inspection of Fidelity Life … following allegations of breaches of the Insurance Act and possibly other statutes” is commendable. We do have the framework and the necessary regulations. What we need is enforcement to bring culprits to account.

The report to the House of Commons does question the work of PwC regarding the sale of BHS as a going concern. The directors had assessed that BHS was a going concern on the basis of continuing financial support from Taveta, a company owned by Green. BHS would lose the ongoing support from Taveta upon sale. On one hand, Grant Thornton’s due diligence had identified significant risks regarding its cash flow requirements. The investigators believe PwC should have interrogated whether BHS was being genuinely sold as a going concern.

As a consequence of the BHS pension debacle, the Financial Reporting Council set in motion an investigation into the conduct of PwC regarding the August 2014 year-end audit.

At the end of it all, there must be checks and balances to protect the vulnerable. The scrutiny from parliament and regulators is important insofar as it cultivates an environment laden with good corporate governance and competence. Everyone must be kept on their toes, particularly those who have responsibility towards the less influential members of society; they would be more vulnerable if we all relaxed and leave things on auto-pilot.

Whoever tampers with pensions, depositors or public funds must tell a story in future and discourage others from doing so.

Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications. — daniel.ngwira@gmail.com, +267 73 113 161.

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