The Bank of England is to blame for the BHS pension crisis

I never thought I'd say this, but I'm starting to feel sorry for the billionaire who is the current "unacceptable face of capitalism."

Retail tycoon Sir Philip Green has been pelted by MPs and the press ever since BHS collapsed last month, putting 11,000 jobs at risk. Now those workers face cuts to their pensions too.

But the pension cuts aren't Green's fault. Surprisingly, the Bank of England is responsible for that.

Some history: Green owned the department store until last year when he sold it for £1 to Dominic Green, a three times bankrupt former racing driver with little retail experience.

Everyone is angry about this sale - how could Green have ever thought it was a good idea? But worse than that is the hole in BHS's pension scheme. When the retailer went under, the company's scheme showed a deficit - it owes more it can pay to retired workers - which pushed it into the arms of the "Pensions Lifeboat", the state-backed Pension Protection Fund (PPF), with a deficit of £275 million.

The PPF will now make sure the scheme's 20,000 members get their pensions, but members who have not yet reached retirement age will have to take a 10% haircut on their payouts.

Now there are calls for Sir Philip to meet the pension shortfall. The government Pensions Regulator is pursuing an anti-avoidance action against Arcadia, his company, to try and claw back money for the scheme. There have even been calls for Sir Philip, dubbed the "unacceptable face of capitalism" by MP Richard Fuller, to be stripped of his knighthood.

The popular narrative runs that Sir Philip profited when the going was good, taking around £400 million in dividends from BHS in the early 2000s. But he failed to re-invest in the chain, letting it rot, and then simply washed his hands of his obligations to the pension scheme when things got tough, via the £1 sale. He walked away from his commitments.

Except this narrative glosses over one massive, crucial event - the 2008 financial crisis and what the Bank of England did in response.

'Zombies' abound

While BHS was no doubt underinvested in, it was the financial crisis that caused BHS' pension crisis. The Guardian has a good graphic on this, showing that in 2008 the scheme was actually running a £3.8 million surplus. A year later - with stocks and bonds around the world plummeting - a huge £137.9 million deficit appeared.

This is not because cash-strapped consumers stopped shopping at BHS. It's because the investment environment fundamentally changed post-2008. To keep the UK economy liquid in the crisis, between August 2008 and March 2009, the Bank of England cut the base interest rate from 5% to a record low of 0.5%, where it has stayed ever since. Those BofE's low rates are still propping up the economy today.

This was a disaster for pension schemes, however. Among the worst hit was the type BHS had - a so-called "defined benefit" (DB) scheme. DB schemes promise a guaranteed payout to pensioners when they retire, £30,000 a year, for example. Often this is also linked to things like the retail price index, meaning that final payout must rise with inflation.

The problem arises in the difference between the amount of money set aside to cover eventual pensions and the obligations. The entire DB scheme is a bet that today's investments will always come good, forever, and cover tomorrow's guaranteed payments. Schemes had been banking on annual returns from their investments of at least 5%. Suddenly, with low interest rates, and stocks going through the post-crisis trough, it's down to 0.5% as a base. That means they have to put up a lot more new money to get the returns they need.

Add to this the fact that the businesses backing up these schemes suffered a downturn at the same time as interest rates collapsed, meaning they have less cash to put into these schemes, and you've got a pensions crisis.

BHS is indicative of a wider problem in the pensions industry, not a flagrant example of cowboy capitalism run amok. A recent study estimated the black hole in the nation's pensions schemes is £800 billion, despite employers pumping in £160 billion since 2006.

In his submission to the Parliamentary inquiry on BHS, ex-Pension Minister Steve Webb said there are hundreds of "zombie" DB pension schemes in the UK that look a lot like BHS.

People are living longer, and therefore increasing pension schemes liabilities, plays a part in the black hole. But the biggest cause is low interest rates.

Webb told BI: "A dose of high inflation would go through this like a dose of salt. Higher interest rates and inflation would very quickly change the situation. But we're going to have a sizeable deficit for years to come.

"Clearly there is a problem here and that ain't going to change. Other things being equal, there's a set of things out there where unless something turns in the economy dramatically or interest rates go up, the deficit is going to get bigger not smaller and everyone else is going to have to pick up those deficits."

'If you don't pull the plug a bunch of British companies will have to pay millions of pounds extra'

Economists complain that low interest rates rob savers, and this is perhaps the biggest example. But what could the Bank of England do? In the grand scheme of things, creating a pensions crisis down the road is probably better than letting the economy collapse into a new Great Depression.

Not much is being done to tackle the problem either, as Webb explained to me. He thinks in many cases the best thing to do would be to forcibly wind up failing "zombie" schemes before they reach the actual point of failure.

"The problem is, running their course probably means going into the PPF anyway but with a bigger deficit. By definition, that means somebody has got to pay and that in effect is the sponsoring employers of the remaining DB schemes." The PPF is funded through a levy on healthy DB schemes.

"If you don't pull the plug, a bunch of British companies will have to pay millions of pounds extra. That's coming out of profits for their business, wages for their staff, etc. It is politically very difficult to do but for the wider public good, that might be the right thing to do."

It's clear then that these DB schemes are a millstone around the neck of many businesses, as they proved to be for BHS, and as they proved to be for Tata Steel.

'Project Thor'

What's more, not only is BHS indicative of a wider pensions crisis, it looks increasingly clear that Sir Philip Green and Arcadia were active in trying to tackle the deficit.

BHS's pension trustees approved a 23-year recovery plan to get the scheme back in the black in 2009, a length described as "a-typical" by the government's pensions regulator. So far, so eyebrow raising.

But details have been emerging about "Project Thor," a plan in 2012 to reduce the pension liabilities by buying out some members and moving others to a new vehicle with an £80 million cash injection from Sir Philip. The Pensions Regulator apparently stymied this plan. Clearly, Sir Philip Green was not as fast and loose with BHS and its pensioners as has been made out.

All of this is not to say that Sir Philip and Arcadia do not have questions to answer and possible obligations to meet.

The £1 sale to an ex-bankrupt racing driver with no experience raises serious questions about due diligence. Since no recovery plan was reached prior to the sale, perhaps the billionaire has some duty to meet the deficit. And BHS was clearly underinvested in for years while the wider Arcadia group was making huge profits.

But let's stop pretending that, for all his expletive-laden outbursts and bullying, Sir Philip Green is the pure evil pantomime villain in this. When it comes to the pension deficit, he played the cards he was dealt.

In this case, the Bank of England stacked the deck.