Learning the lessons of Carillion

Across the six large schemes there is a combined section 75 deficit of around £2bn – more debt than the group owes its banks. Unsecured creditors like the schemes are likely to get little or nothing back from the insolvency.

There are many views as to what caused the failure: systemic issues with outsourcing, poor management, excessive dividends, construction industry contraction, the banks  …the pension schemes?

There is no getting away from trustees’ responsibilities to understand scheme and employer viability, and to take difficult decisions when it’s necessary

My own view is that the schemes were far from the main catalyst. They required funding and this meant less cash in the business, but contributions were relatively modest.  

The key pensions question from this has to be whether trustees can do anything differently in future, and what leverage they have to protect members.

Carillion schemes did little wrong

The collapse has shone a light on the importance of valuations and the negotiations that accompany them.

Trustees’ first step should be to negotiate the triennial valuation as robustly as possible, seeking cash or security for the scheme as soon as affordable, and taking employer covenant advice to support them.

Carillion’s trustees did this, but reached an impasse because the company said it could pay no more.

Next, they might ask the Pensions Regulator to intervene, who may consider using its section 231 powers to set contributions.

The Carillion schemes did this too, and the regulator threatened to use s231, gaining an increase in contributions from the level at a previous valuation.

Trustee power is limited

Within their own gift, trustees can take action to leverage the scheme’s rules and circumstances.  

They may be able to derisk the investments – this may not compel an employer to pay more, but it’s a start, and it protects the scheme if insolvency of the employer is on the horizon. It would likely also mean strengthening the technical provisions, which should get the employer’s attention.

The only other option, if it exists at all, is to ‘go nuclear’ – exercising wind-up powers or calling in any security that is in place.  

The leap from derisking to exercising wind-up empahsises how limited trustees’ options can be – it is potentially all or nothing.  So should trustees make this leap and press the big red button, probably the biggest decision any trustee could be asked to make?

In most cases the answer will be no, but given the severe losses schemes are facing, the answer will on some occasions be yes.

How to assess employer strength

Trustee may need to raise the stakes where schemes are not getting the right support from employers and where scheme risk is increasing, but this threat should not be made lightly.

They should take advice from a covenant adviser with appropriate experience to help them form and deliver a plan.

Some relevant considerations will be:

• Is the scheme cash flow solvent on prudent assumptions?  Could it fail?

• What is the potential return for the scheme on insolvency – could this be better than taking the risk on the recovery plan?

• How high is Pension Protection Fund drift?

• Would insolvency today mean more cash for the scheme than insolvency further down the line?

• What are other stakeholders doing – are lenders seeking repayment and/or imposing tighter terms?

• Is the employer forecasting a cash flow pinch-point when it will run out of money without further support? If so, how long has it got?

• Has the employer still got the support of customers and suppliers?

 

Trustees must be brave

No stakeholder wants to be the one to bring a business down, but the system we work in can be somewhat binary.  

Could something be changed to avoid this? Maybe the regulator will be able to support trustees more if the white paper makes s231 powers easier to exercise.

Critically though, there is no getting away from trustees’ responsibilities to understand scheme and employer viability, and to take difficult decisions when necessary. It is not fair or appropriate for trustees to rely on the PPF underpin of benefits at the expense of other levy payers.

Jo Harris is a trustee representative at professional trustee company Dalriada