Committee says watchdog failed to fact as firm racked up debts to pay dividends and bonuses

MPs have accused the Pensions Regulator of failing to act while Carillion racked up debts to pay dividends and executive bonuses, as the business built up a pension deficit that reached nearly £1bn by the time it collapsed this month.



The House of Commons work and pensions committee, which is investigating Carillion’s collapse into compulsory liquidation two weeks ago, criticised the Pensions Regulator for allowing Carillion’s pension trustee to defer pension deficit contributions in September in a bid to keep it afloat by enabling more borrowing.



Q&A What is a pensions deficit? Show Hide A deficit occurs when a salary-related pension scheme doesn't have enough assets to pay for all its future possible liabilities - ie, payouts to workers when they retire. How is it measured? There are different ways of measuring a deficit, which can result in widely different figures. However, it is a legal requirement to reduce any deficit over time. This requirement has changed a number of times in recent years as the government has tried to get the right balance between protecting members' future pensions and not putting so heavy a funding obligation on employers as to encourage them to close schemes, according to workSMART, a website run by the TUC. Things that affect a scheme’s funding position include contribution levels, investment returns (both those being achieved now and what experts forecast for the future), interest rates, inflation and life expectancy data. What can be done to top up pension schemes? Either the employer makes additional payments to narrow the deficit, or the trustees find other ways of reducing it, such as cutting benefits, upping member contributions or even shutting down the scheme so that workers can't carry on paying into it.

The committee’s comments came as it published a letter from Robin Ellison, chairman of Carillion (DB) Pension Trustee Limited, the trustee of six of the company’s defined-benefit pension schemes. Ellison disclosed that Carillion had regular meetings with the Pensions Regulator from 2008 onwards.

Carillion collapsed with debts of £1.3bn and a host of unfinished public contracts.

There are varying estimates of Carillion’s pension deficit. Ellison’s letter says the trustee valued it at £990m at the end of 2016, while the Pension Protection Fund’s valuation is £800m and the pension liability on a buy-out basis – the estimated cost for an insurance company to buy out the accrued benefits – is “nearer £2bn”. However, the regulator will focus on a figure between £800m and £990m, because no insurer is expected to take on the pension scheme liabilities.

Frank Field, chair of the work and pensions committee, said: “It’s clear that Carillion has been trying to wriggle out of its obligations to its pensioners for the last 10 years. The purported cashflow problems did of course not prevent them shelling out dividends and handsome pay packets for those at the top.

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“This culminated in negotiating deficit contributions away entirely last autumn to enable more borrowing. Remarkably, this was endorsed by the trustees and the Pensions Regulator.”

Field said the Pensions Regulator had questions to answer. “They have been sniffing around Carillion – at the trustees’ behest – since at least 2008, though it is not apparent to what effect. When 10 years later the company collapses with £29m in the bank and £2bn in pension liabilities it doesn’t look good for them.”

The Pensions Regulator confirmed it had been working with Carillion and the pension scheme trustees for a number of years.

“The current regulatory framework attempts to balance the needs of a scheme and its members with the needs of an employer to invest in their ongoing business – this should be reflected in the length and structure of the recovery plan.

“The content of Carillion’s recovery plans, and its payment of dividends, did not highlight sufficient concern to justify the use of our powers based on the group’s trading strength as presented at the time in their audited accounts. However, it is clear from the company’s announcements since July that their underlying profitability was significantly weaker than market understanding or the position set out in prior year accounts.”

The Pensions Regulator’s powers include enforcing a schedule of pension contributions, appointing independent trustees, banning trustees who are deemed substandard, and issuing improvement notices directing employers or pension schemes to tackle any problems.

After analysing Ellisons’s letter, the work and pensions committee said Carillion had been “falling short” of what the trustee expected it to contribute to pension schemes since 2008. The company pointed to cashflow problems in 2011 and 2013 – but paid more than £70m in dividends in both those years.



Ellison will be quizzed by MPs from the work and pensions committee and the business, energy and industrial strategy (BEIS) committee as part of their joint inquiry into Carillion’s collapse on Tuesday.

Quick guide Britain's five worst pension deficits in 2016 Show Hide Shell - £6.92bn The deficit at the global energy group Shell is large and has leapt 240% in a year; in 2015 the deficit was just under £2.9bn. The company has pension assets of more than £60bn, though it provides little detail on how these assets are invested, says LCP, a pensions consultancy. BP - £6.72bn BP, one of the biggest oil and gas companies, closed its final salary pension scheme to new entrants in 2010. Its deficit represented 7% of the value of the company in 2016. Its 2015 deficit was £4.21bn, says LCP. BT - £6.4bn BT revealed pension liabilities of £60bn in its March accounts, from £50bn a year earlier. It was one of two FTSE 100 firms to pay more than £1bn into defined benefit schemes in its 2016 accounting year. BAE Systems - £6.08bn BAE Systems announced in November 2017 that, as at March that year, the total of the deficits across its UK pension schemes stood at £2.1bn. That is much lower than the figure quoted here because it has put a higher estimate on the future returns from the assets in its schemes. Tesco - £3.17bn Tesco shut its defined benefit pension scheme in 2015. The deficit amounted to 22% of the company's value in 2016, said LCP - down from 24% in 2015, when its deficit was £4.84bn.

Carillion ran up debts and sold assets so it could continue to pay dividends to shareholders between 2012 and 2016, according to a parliamentary paper published last week. It paid out £217m more in dividends than it generated in cash. Its debts surged from £242m to an estimated £1.3bn in the eight years to January 2018.



Carillion has 13 UK defined benefit pension schemes with 27,000 members. Its pension deficit is one of the largest among FTSE 350 companies.