The UK’s Pension Protection Fund (PPF) is preparing to take on pension schemes linked to UK construction company Carillion, which entered liquidation this morning.
The company’s management were in talks with lenders and stakeholders over the weekend in a bid to save the company, but these failed. Carillion had a combined debt of more than £900m (€1bn), according to media reports.
Carillion’s defined benefit (DB) pension schemes had total assets of £2.6bn but a shortfall of £804m at the end of 2016, according to its latest annual report.
The PPF was designed as a safety net to take on DB schemes if their sponsors go bust. In its most recent annual report, the PPF declared a £6bn surplus.
A spokesperson from the PPF said: “We can confirm that we have been notified that some of the Carillion group’s companies have gone into liquidation and we know this news will raise serious concerns for their employees.
“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.”
Schemes typically take roughly two years to go through the PPF’s assessment period, during which time they will pay benefits according to the PPF’s limits. Pensioners will receive 100% of their benefits but annual increases may be reduced, while those yet to retire will be guaranteed 90% of their benefits, subject to an upper limit (currently £34,655 a year).
Carillion’s schemes have roughly 28,500 members, 12,400 of which were pensioners as of December 2016.
In a statement, Nicola Parish, executive director at The Pensions Regulator, said: “The situation regarding Carillion is concerning for all those affected. 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.
“It is too early to comment on possible outcomes for the various pension schemes connected to Carillion. In the meantime, I would like to assure scheme members that the government set up the PPF to support members of workplace pensions in precisely these circumstances.”
PricewaterhouseCoopers (PwC) has been appointed as liquidators of Carillion. On its website, PwC said there was “no prospect” of shareholders receiving any money.
The UK government is reported to have agreed to supply funding to keep Carillion’s public sector work operational in the short term.
Questions raised over dividend policy
In the immediate aftermath of the liquidation announcement, industry commentators flagged Carillion’s dividend policy as a cause for concern.
The company’s board raised its payment to shareholders for 16 consecutive years since it was founded in 1999, according to the 2016 annual report.
2016 Carillion annual report says dividend ‘has increased in each of 16 years since formation of company’; Is this really acceptable alongside a pension fund deficit over half a billion pounds?— Steve Webb (@stevewebb1) January 15, 2018
The same report detailed that it had paid £393.7m to shareholders since 2012, while making deficit contributions to the DB schemes of £209.4m in total.
Since last year, TPR has increased its emphasis on companies striking a balance between dividend payments and pension scheme deficit reduction payments.
In June 2017, the regulator’s former head of regulatory policy Andrew Warwick-Thompson said TPR would be “likely to intervene” if a company paid out more in dividends than scheme contributions, if it negatively affected the scheme’s recovery plan.