Carillion collapse sparks calls for better DB rules

The contractor, which holds large government contracts for projects like the HS2 railway line, entered into compulsory liquidation on Monday after last-minute talks with lenders, the Cabinet Office, and pension authorities failed.

The Liberal Democrats have called for an inquiry into the collapse, while Work and Pension Committee chair Frank Field reiterated his calls for the Pensions Regulator to be given mandatory clearance powers.

From the perspective of the members this is the worst outcome, but sadly there are some scenarios where you can’t retain an ongoing employer

Martin Hunter, Xafinity Punter Southall

Carillion leaves behind an accounting deficit of £711.4m before tax treatment, although the cost to the PPF is likely to be significantly greater if all 28,000 DB scheme members fall into the lifeboat.

Its s179 deficit, the cost of securing PPF-level benefits, will be greater than this if all the schemes transfer to the lifeboat, and has reportedly been estimated at up to £900m by the chairs of the DB schemes.

Carillion’s £3.31bn DB liabilities, which are spread between 13 schemes and supported by assets of £2.6bn, will be among the largest ever absorbed by the PPF. However, the insolvency is not expected to threaten the lifeboat, which currently has a surplus of £6.1bn.

Some schemes may avoid PPF

Nicola Parish, executive director at the Pensions Regulator, said it was too early to speculate on what outcome may befall the members of Carillion’s pension schemes.

Non-retired members are guaranteed 90 per cent of their benefits, subject to a cap and minimum increases, by the PPF. It is still unclear if all 13 schemes will enter the lifeboat fund. Pensioner members will see their benefits paid in full, albeit with minimum increases.

Parish said: “We continue to work closely with all relevant parties in what are very challenging circumstances, including the pension scheme trustees, the official receiver and the government, to help achieve the best possible outcome for members of the pension schemes and those impacted by the situation.”

A spokesperson from the PPF said: “We want to reassure members of Carillion’s defined benefit pension schemes that their benefits continue to be protected by the PPF and will continue to be protected if or when their scheme enters the PPF assessment period.”

Calls for inquiry

Whatever the final outcome for the pension schemes, many members will see their benefits cut to some extent.

The insolvency and resulting impact on pensions did not sit well with opposition politicians.

Stephen Lloyd, MP for Eastbourne and Willingdon and Liberal Democrat spokesperson for work and pensions, has called for an inquiry into Carillion’s collapse.

He drew attention to the government’s awarding of £2bn in contracts to the company after it had issued a profit warning.

“Part of the remit of the inquiry should be to establish whether the government bears additional responsibility for making up any pensions deficit as it continued to award contracts to Carillion,” said Lloyd.

Do schemes need a release valve?

Some pensions commentators expressed their dissatisfaction with pensions legislation and the lack of flexibility afforded to struggling companies.

Ian Browne, a pensions expert at provider Old Mutual Wealth, said: “There are these high-profile schemes that are having difficulties, and they are having a significant impact on the employer and their ability to keep going.”

The Department for Work and Pensions’ green paper on DB stated that there are no systemic affordability issues in the market, but Browne pointed to a number of cases as evidence to the contrary.

The DWP will publish its white paper on the issue in spring this year, having delayed its release.

He said a change to inflation protection rules should be considered, allowing schemes tied by their deeds to the retail price index to change to the consumer price index, which is usually lower and can significantly reduce liabilities.

“Now’s the right time for the government to do that, or take this a bit more seriously,” said Browne, admitting that it was a “very difficult balancing act” between making liabilities affordable and protecting accrued pensions.

RAAs top of DB concerns

Meanwhile Richard Pettit, a partner in the pensions regulatory practice at law firm Burges Salmon, said he hoped companies and schemes would be able to open talks with the regulator and PPF earlier, to avoid unnecessarily triggering insolvency.

One of Pettit’s former clients had seen a sponsor go bust as a result of the current rules on regulated apportionment arrangements, which require insolvency to be inevitable within 12 months. He said any relaxed system would have to be well designed to avoid gaming by employers.

“The trustees and the employer were engaging with the regulator and the PPF but weren’t able to do so fully,” he said about his client. “Suddenly it got too close and it was uncontrolled insolvency, and people were losing their jobs.”

Anne-Marie Winton, a partner at Arc Pensions Law, said that “one of the premises of an RAA is that there is a company that is worth saving at the end of it”, speculating that Carillion’s other problems might have disqualified it from this solution.

But she added that the process for granting RAAs could be improved, by removing the 28-day waiting period, which could have frustrated other fast-moving deteriorations in sponsor health, and by giving a clearer definition of the 12-month insolvency rule.

She also supported companies being made to disclose a range of deficit calculation in their accounts, so investors are not fooled by the often smaller IAS 19 deficits of schemes.

Members could suffer from relaxed rules

However, support for changes to the regulatory and legislative framework for DB schemes is far from uniform across the industry.

“From the perspective of the members this is the worst outcome, but sadly there are some scenarios where you can’t retain an ongoing employer,” said Martin Hunter, a principal at consultancy Xafinity Punter Southall.

He said the RAA test’s stringency felt appropriate, adding: “I find it hard to see how those tests could be weakened while still protecting the members of DB schemes.”

Good trusteeship is essential in situations involving distressed sponsoring employers. Hunter said trustees with concerns about covenant should look to secure guarantees and contingent funding where possible, and adopt integrated risk management plans to deal with any deterioration.