Regulator rebuked for 'feeble' response to Carillion underfunding

Carillion's collapse, which left a net pension liability of around £2.6bn – with 27,000 members of its defined benefit schemes destined for the Pension Protection Fund – has been widely publicised in recent months.

In January, the Work and Pensions Committee and the Business, Energy and Industrial Strategy Committee launched a joint inquiry – during which MPs took written and oral evidence from Carillion’s directors, pension trustees, investors, regulators and advisers.

Corporate carelessness inflated pension liabilities

In the committees’ final report, published on Wednesday, Carillion’s “rotten” corporate culture is heavily criticised – from the finance director’s “contempt” towards scheme funding, to the company’s “relentless dash for cash, driven by acquisitions, rising debt… and exploitation of suppliers”.

It urges the government to refer the statutory audit market to the Competition and Markets Authority, due to concerns over conflicts.

The report also calls for “an ambitious and wide-ranging set of reforms” to reset systems of corporate accountability in the long-term public interest.

The committees have made it clear that they think the board’s financial recklessness contributed towards the company’s bulging pension liability.

They noted that the deficits of Carillion’s two main DB schemes “were not unusually high by DB standards and may well have been manageable”.

But as a result of the company’s acquisitions policy, it took on responsibility for several additional DB funds in deficit. When it entered liquidation this year, it had responsibility for funding 13 UK DB schemes, the report highlights.

Frank Field, chair of the Work and Pensions committee, said: “Same old story. Same old greed. A board of directors too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners.”

Watchdog condemned for "feeble" response

While the report points to corporate “recklessness, hubris and greed” the regulator’s role has also come in for a significant amount of criticism.

In February, MPs lambasted the regulator for its grasp of key facts on DB when chief executive Lesley Titcomb appeared before the committees.

In their final report, the committees further denounced the watchdog for its timidity, noting that its “feeble response” to the underfunding of the contractor’s pension funds was a threat to impose a contribution schedule, “a power it had never – and has still never – used”.

The regulator “failed in all its objectives” regarding Carillion’s pension schemes, and the “Pension Protection Fund and its levy payers will pick up their biggest bill ever”, the report adds.

Oliver Morley, chief executive of the PPF, stressed that members of the Carillion pension schemes continue to be protected by the pensions lifeboat. 

“While the collapse of the company has resulted in the largest claim to date on the PPF, we remain in a strong position. Members of the pension schemes will be some £800m to £900m better off as a result of our protection,” he said.

In the report, the committees acknowledged that the contractor was run so irresponsibly that its pension funds may well have ended up in the PPF regardless.

However, they said the regulator “should not be spared blame for allowing years of underfunding by the company”.

Titcomb said the watchdog actively seeks to learn lessons to better protect members of pension schemes.

She said the committees’ report underlines the significant changes already made at the regulator, but that there is more work to do.

“We are now a very different organisation; we are clearer about what we expect, quicker to intervene and tougher on those who do not act in the interest of members,” said Titcomb – reiterating the main message in the regulator’s recently published three-year corporate plan.

“We have reinforced our regulatory teams on the frontline and are embedding a new regulatory culture. We sought stronger and clearer powers on scheme funding from [the Department for Work and Pensions] and we are working with the government on how to implement the changes in the white paper, alongside our wider changes to how we regulate,” she added.

No more knee-jerk reactions

Martin Hunter, principal at consultancy Xafinity Punter Southall, said: "The timing [of this report] is very, very important, and this will have a big influence on the white paper and the consultations that are coming off the back of that.”

Despite taking "quite a lot of criticism” in the report, Hunter said the regulator is now trying to pursue a different strategy to the passive approach so lambasted by the committees.

Earlier this month the regulator announced that it is expanding its headcount by 12 per cent as part of its plan to intervene more widely, while becoming more vocal about what it expects of schemes and employers.

While pressure has been put on the regulator to step up its game, particularly in the context of BHS and Carillion, it has a difficult balance to strike.

"It has at least three contradictory objectives – which are to protect members’ benefits, to reduce risk of calls on the PPF, and… not impair the sustainable growth of employers,” noted Mark Smith, partner at law firm Taylor Wessing.

“Which one prevails?” he asked, urging MPs to recognise these tensions and develop a framework that addresses it for the long term, rather than “a knee-jerk reaction to current crises”.