Carillion executives systematically underfunded the firm’s pension scheme, while The Pension Regulator (TPR) failed to protect members, a damning parliamentary report on the construction giant’s bankruptcy said today.
The inquiry, conducted by the Work and Pensions and BEIS select committees, highlights that as of 2013, Carillion had a combined DB deficit of £86m from and earlier scheme, which according to the report could have been considered manageable. However, the construction firm subsequently acquired a number of other firms with significantly higher deficits, which resulted in the total pension deficit at the December 2016 valuation to be estimated at £990m.
It reveals that when Carillion entered liquidation in 2018, it had responsibility for funding 13 DB pension schemes, of which 11 will be referred to the Pension Protection Fund (PPF), leaving the lifeboat for pension savers with a £800m hit. This represents the largest ever claim on PPF resources.
The report also uncovers a history of conflict between Richard Adam, Carillion’s finance director, and the pension fund’s board of trustees, with both sides repeatedly disagreeing on the valuation of the pension deficit and need for additional funding.
Going back to 2011, the Carillion trustees calculated the firm’s deficit at £770m and requested annual recovery payments of £65m for 14 years to address it. Meanwhile, the firm claimed the deficit was at £620m and offered recovery contributions of £33.4m annually, claiming that it could not afford higher payments.
Gazelle Corporate Finance, an independent covenant provider for the trustees, stressed that those claims were contradicted by the firm’s high dividend payments and much more optimistic presentations to the City in a bid to attract investment. Gazelle concluded that Carillion should not have been paying such high dividends at the expense of funding its pension scheme.
The inquiry quotes trustee chair Robin Ellison who stated at the time that Carillion finance director Adam saw funding pension schemes as a “waste of money”. “The pension trustees were outgunned in negotiations with directors’ intent on paying as little as possible into the pension schemes. Largely powerless, they took a conciliatory approach with a sponsor who was their only hope of additional money and, for some of them, their own employer,” the inquiry states.
Meanwhile the firm’s former directors were not members of the DB pension schemes in question but received generous employer contributions to a defined contribution scheme. For example, Richard Howson and Richard Adam received employer contributions of £231,000 and £163,000 respectively for their work in 2016, as the report reveals. Moreover, their performance indicators to determine bonus payments did not include their performance in reducing the pension deficit. leaving them with no incentives to do so.
The Carillion scandal raises questions of the role of TPR. The inquiry states that the regulator failed in its objectives to protect members, while the Pension Protection Fund (PPF) is expected to be hit with its biggest bill ever. It argues that the regulator should have imposed a contribution schedule on the employer, imposed a maximum term for recovery payments and intervened on the firm’s dividend payments.
Lesley Titcomb, chief executive of TPR, responds to these challenges: “We actively seek to learn lessons to better protect members of pension schemes. In the past the balance between members and employers was not always right. The report underlines the significant changes already made at TPR but there is more work to do so.”
During the announcement of its corporate plan last week, TPR pledged that it intends to spend more money on protecting pension members and cracking down on rogue employers, it also confirmed that it intends to make greater use of its regulatory powers.
However, Ian Browne, pensions expert at Old Mutual Wealth, argues that more could be done to enforce compliance: “Companies and their directors need to be terrified of the wrath of the TPR, something the committee feel is far from the case currently. Indeed in 13 years of DB scheme regulation, TPR has issued just three warning notices relating to its section 231 powers, and has not seen a single case through to imposing a schedule of contributions. So there is some merit to this criticism,” he says.
