A Carillion warning bell on pensions

The early news today was dominated by the well-placed press release from the Department for Work and Pensions Select Committee that Carillion had been ‘trying to wriggle out of pension obligations for last ten years‘, in the words of Frank Field, the Committee chair.

There is a lot to be written yet about the demise of Carillion, and the parliamentary authorities have tackled the pensions aspects of the issue with an appropriately forensic gusto befitting a private company falling into the arms of the public-backed Pensions Protection Fund to the tune of just under £1bn (or, perhaps, more). Today’s news was sparked by the release by the DWP of a response to some of the Committee’s questions by Robin Ellison, Chair of the Carillion pensions trustee company responsible for six of the company’s schemes, and who appears in person tomorrow to give evidence to the Committee. The letter’s well worth a look, even to non-experts, and there are several things to pick up from it although I wanted to focus here on just two headlines:

1. The trustees were seeking to secure higher contributions (it looks like in terms of deficit repair contributions) at each of the 2008, 2011 and 2013 scheme valuations based on advice they had received about the company’s covenant (basically, the extent to which it is good for its money and reflecting in reality a delicate balance of interests). However, they had been unable to secure agreement with the company and the Pensions Regulator decided not to exercise its powers to intervene.

2. The trustees were asked – and they agreed – formally to defer contributions to the scheme (again, it seems likely that these are deficit contributions although they might also be normal ones) in September 2017 to allow the company to secure more deficit funding, with these contributions due to be paid, with interest, by the end of January 2018. Of course, the company’s compulsory liquidation means that this won’t now happen.

The current Prime Minister has been voicing a few, superficially welcome slogans about what she will do in response to re-balance boardroom excesses (including on pensions) with the interests of hard-working employees. Aside of the speculation about a leadership challenge, however, I suspect that Theresa May is not particularly good for her covenant either, as evidenced not least by the backsliding from the earlier commitment to worker directors.

The Ellison letter is shocking for what it reveals about the lackadaisical way that workers’ pension schemes – conveying, let’s not forget, deferred pay – are treated at corporate level.

Firstly, it should not be possible for the Pensons Regulator to decide, repeatedly, not to intervene in a lack of agreement between scheme trustees and a scheme sponsor (such as Carillion) over how much the company is required to pay in contributions into the scheme, especially on the basis of technical advice about the strength (or weakness) of the covenant. Whatever the strengths of the regulatory regime in terms of the ability of the Pensions Protection Fund to absorb Carillion, TPR is going to cop it on this one, and not least from Frank Field’s Committee.

Secondly, in particular when set against this sort of regulatory backdrop, it should be possible neither for a company to hold the trustees of its pension scheme to ransom over a proposal to defer contributions to secure loan financing; nor for the banks involved to require (or appear to require) such a deferral before they will consider getting involved. Here, the trustees had little choice but to agree to the proposal given that the failure to secure the loan would have brought them several more immediate problems: the deferral is not their fault. It is, however, the fault of the financial industry which sees workers’ pension schemes, and the commitments that companies enter into in relation to them, as inconvenient irrelevancies. The upshot has been that Carillion has treated its pension schemes – whose aim is to provide income in retirement for Carillion’s workers – as a corporate and financial plaything in a very similar way to how Robert Maxwell used Mirror Group Newspapers pension schemes as collateral for loans to his business empire. It seems we have learned very little despite over 25 years of regulation.

At a time when the pensions industry needs to rebuild the confidence of pensions savers, including the young, the collapse of Carillion is a disaster for the workers who are directly involved and who will have to take a haircut on their pensions. More than that, however, it’s a disaster in terms of what it says about the continued inability of the regime within which schemes operate to prevent the manipulation and the abuse of pension schemes before problems arise. Any government worth its salt should be paying urgent and specific attention to the consequences of that.