On Monday 15th January 2018, “Blue Monday” sadly rang true for the tens of thousands of Carillion’s pension scheme members in the numerous (the Carillion website lists 8, others report up to 13) defined benefit pension schemes that the Carillion UK group sponsors, when 6 of Carillion’s UK companies entered into liquidation.
A number of Labour party members have called for an investigation into the fact that the Government continued to award contracts to Carillion despite three profit warnings in the last six months, stating that the Government was “deeply negligent” in its approach to Carillion. No doubt the trustees of the affected Carillion defined benefit pension schemes will have been in frequent contact with Carillion over the last year, not least because of the increase in the deficits of its defined benefit schemes since their last valuation formal valuation.
Only those closest to the matter will truly understand the relationship and dynamic between the trustees of these schemes and the sponsoring employers. Certainly, it appears that there were not inconsiderable payments going into the schemes by the sponsoring employers (notwithstanding the even larger dividend payments that have been disclosed) and the trustees had in recent years managed to reduce the deficits by an alternative de-risking strategy.
However, to corporate trustees (often with the support and assistance of professional pension trustees), collapses such as these do not necessarily, in their entirety come “out of the blue”. As a pensions lawyer, I know all too well the dilemma and often frustration that pension scheme trustees (and their advisers) face in the triennial valuation process, notwithstanding dynamic trustees, advisers and even engagement with sponsors of pension schemes. Unfortunately, inconsistency in the Pensions Regulator’s approach to their treatment of and involvement in the valuation process of defined benefit schemes is not uncommon. From experience, where help is sought from the Regulator, sign off by the Regulator can occur more readily and easily than where trustees are more comfortable with an agreed position. The Regulator’s comments last week have been decidedly cautious. More may follow.
What will this mean for those affected?
A spokesman for the Pension Protection Fund (PPF), the lifeboat funded by employers of defined benefit pension schemes, has said: “We want to reassure members of Carillion’s defined benefit pension schemes that their benefits are protected by the PPF.” The Government has said something similar. This isn’t the complete story, however, as many members’ benefits will be reduced if the PPF assumes responsibility for the affected Carillion pension schemes. Previously promised increases to pensions may also be lower within the PPF than under the affected schemes’ governing documentation. Yes, it may be a more valuable pension benefit than many (typically younger) workers have in this country, where defined benefit arrangements have never been available to them, but companies over the years have often focussed on the extensive benefit of these type of pension schemes provide, not uncommonly at the expense of salaries and increases to these.
The chairs of trustees of the affected Carillion schemes have stated that they would be writing to affected members last week, but as it takes often more than a couple of years for the PPF finally to assume responsibility for schemes in this situation, it is going to be quite some time before members know the true extent of Monday’s announcement.
What will (or should) this mean going forward?
These may be different questions.
Whilst the PPF is in significant surplus, the entry of the Carillion defined benefit pension schemes into the PPF would be “the biggest-ever hit on the PPF”, former pensions minister Steve Webb said this last. With the PPF going through the process of assuming the British Steel and BHS pension schemes, there may well be changes to the PPF levy that sponsors have to pay in terms of amounts and calculations, in order for the PPF to continue to be sustainable, as the Government becomes increasingly unwilling (and / or unable?) since the recession started just over 10 years ago to “bail out” large private companies that fall into difficulties.
Certainly Frank Field, chair of the Work and Pensions select committee of MPs appointed in light of the BHS saga, has been typically vocal, when he said: “We called over a year ago for The Pensions Regulator to have mandatory clearance powers for corporate activities…? that put pension schemes at risk, and powers to impose truly deterrent fines that would focus boardroom minds… If the Government had acted then, the brakes might have been put on Carillion’s massive ramping up of debt and it never would have fallen into this sorry crisis.” Many different organisations have powers to take preventative action. Some, like Frank Field, feel that more extensive powers should be given and then, of course, used where appropriate.
Whether the liquidation of Carillion tips the balance for the current Government to take a more authoritative approach will be a question on the lips of many over the next few months.