Philip Green's retail rescue plan at risk over pension scheme

Sir Philip Green is asking landlords for rent cuts of up to 70% on a swath of stores on top of the closure of 23 outlets as part of a rescue restructure of his retail empire.

The former king of the high street, who employs 18,000 workers, is battling for survival after a collapse in sales and profits at his fashion chains, which includes Topshop, Burton, Dorothy Perkins, Miss Selfridge, Wallis, Evans and Outfit. He is struggling to compete against fast-growing online specialists such as Boohoo and Asos as well as cheaper rival Primark.

Three years ago, Arcadia was making nearly £200m in underlying profits. Sales at established stores are down 9% this year. Green has promised his turnaround plan, backed by just £50m of new investment, will reverse the slump and generate profits of £80m by 2020.

But documents seen by the Guardian show the scale of the financial hit to landlords if they accept a cost-cutting plan designed to prevent the fashion retail group collapsing into administration.

Only 349 stores out of the 566 in the UK and Ireland are unaffected by rent cuts, with 194 subject to cuts of between 30% and 70%. Arcadia also wants the right to quit some of those stores in as little as six months.

What's the problem?

Physical retailers have been hit by a combination of changing habits, unseasonably warm weather, rising costs and broader economic problems. The past year saw the disappearance of Toys R Us, Maplin and Poundworld as a result.

In terms of habits, shoppers are switching to buying online. The likes of Amazon have an unfair advantage because they have a lower business rate bill, which holds down costs and enables online retailers to woo shoppers with low prices. Business rates are taxes, based on the value of commercial property, that are imposed on traditional retailers with physical stores.

At the same time, there is a move away from buying ‘stuff’ as more people live in smaller homes and rent rather than buy. Those pressures have come just as rising labour and product costs, partly fuelled by Brexit, have coincided with economic and political uncertainty that has dampened consumer confidence.

How has the festive season gone so far?

Trading has been tough, particularly for clothing retailers, as another relatively mild autumn hit sales of costly items such as coats and knitwear while shoppers have held out later than ever in the hope of getting bargain presents. The founder of Sports Direct, Mike Ashley, described November as “the worst on record, unbelievably bad” as he warned that warned that Debenhams and other big retail names faced being “smashed to pieces” by a high street downturn.Even online specialist Asos shocked the City when it issued a profits warning earlier this month as it admitted it had lost sales by not offering steep enough discounts during the Black Friday week.

What help do retailers need?

Retailers with a high street presence want the government to change business rates. They also want more political certainty as the potential for a no deal Brexit means some are not only incurring additional costs for stockpiling goods but are unsure about the impact of tariffs after March 2019. Retailers also want more investment in town centres to help them adapt to changing trends, as well as a cut to high parking charges which they say put off shoppers.

What is the government doing?

In the October budget the government announced some relief on business rates for independent shopkeepers. It has also set up a £675m “future high streets” fund under which local councils can bid for up to £25m towards regeneration projects such as refurbishing local historic buildings and improving transport links. The fund will also pay for the creation of a high street taskforce to provide expertise and hands-on support to local areas.

What is the outlook in 2019?

Some retailers could go under. Weakened by a difficult Christmas – which accounts for the entire annual profits of many retailers, and with further Brexit wobbles to come – retailers are facing a tough 2019. Another rise in the national minimum wage in April and the falling value of the pound against the dollar, which is used to buy goods in the Far East, will also add to costs and hit profits.

With landlords already smarting from a series of similar deals by major retailers, Green may struggle to win their backing at a vote on 5 June.

The rescue package also needs the backing of the Pensions Regulator (TPR) which has said the former billionaire’s restructuring plan, known as a company voluntary arrangement (CVA), does not adequately protect the group’s 9,500 pension scheme members.

The regulator and trustees of two legacy pension funds, which have a deficit of up to £750m, will be highly influential in the vote as the scheme is Arcadia’s largest unsecured creditor.

Arcadia wants to halve payments to its legacy pension funds, which have a deficit of at least £537m, to £25m a year for three years as part of a rescue package announced on Wednesday.

Green’s wife, Tina, who is the formal owner of the business, has agreed to top up the pension fund with £100m of additional cash over the next three years to help bridge a deficit that could balloon to about £750m if the company were to go bust.

Related: Philip Green offers landlords 20% stake in Arcadia rescue plan

Arcadia has also offered the trustees of the funds, which were closed to new savers some time ago, security over unnamed assets, thought to be Topshop’s London flagship store, which is worth about £400m, although it has a mortgage of more than £300m.

The Pensions Regulator, which has legal powers to force Arcadia and Green to ensure its pension is properly funded, said: “As part of our role to protect pension savers and the Pension Protection Fund [PPF], we remain in discussions with the company and the trustees to understand the impact of the CVA [company voluntary arrangement] proposals on the scheme and to ensure the strongest possible outcome is achieved.

“We do not consider the proposals are sufficient to ensure that members of the scheme are adequately protected.”

A spokesman for the fund trustees said discussions would continue with Arcadia, with the aim of reaching an agreement before creditors vote on the rescue package on 5 June.

“Now that Arcadia has started the formal CVA process the trustees are writing to all members with information about what the CVA means for them. All benefits are being paid in full. The trustees and their professional advisers are working hard to achieve the best outcome for scheme members,” the spokesman said.

Because a CVA is a form of insolvency, the future of Arcadia’s legacy pension schemes must be considered for entry to the PPF, an industry-backed pensions lifeboat scheme.

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As a result, the PPF, after consulting with the regulator and trustees, will vote on the CVA and will have a major influence on its outcome because the fund is such a large creditor.

The PPF said: “We are unable to comment on whether we will support the CVA until we have reviewed the proposal to identify if it is in line with our published principles and is in the best interest of the scheme and the PPF.

“We understand that this must be a concerning time for members of both schemes and we want to assure them that the PPF is here to protect them.”