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Government must ensure cultural change at UK regulator, say politicians

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The UK pension regulator needs to undergo “substantial cultural change” in addition to being equipped with new powers to avoid another corporate collapse like that of contracting firm Carillion, according to an influential group of politicians.

In a damning report on their inquiry into Carillion’s collapse, the pensions and business select committees said the company’s board was “both responsible and culpable” for the company’s failure.

However, they also found fault with many other actors, including the regulators. One of the most concrete recommendations was reserved for the auditing profession, with the politicians calling for the UK’s big four accountancy firms to be referred for a competition investigation.  

The committees said they had “no confidence” in the supervisors, and accused the Pensions Regulator (TPR) and the Financial Reporting Council (FRC) of being “united in their feebleness and timidity”.

“TPR threatened on seven occasions to use a power to enforce pension contributions on the sponsor that it has never used,” the politicians wrote. “These were empty threats; the Carillion directors knew it and got their way.”

The MPs noted that TPR had pledged to be “quicker, bolder and more proactive” but said they were “far from convinced” that its current leadership was equipped to effect that change.

It was the government’s responsibility to ensure this cultural change happened at both TPR and FRC, according to the politicians. Without this, any steps the regulators took or new powers they were given would have little impact, the committees said.

Their report indicated that the Work and Pensions Committee would “further consider TPR” in its inquiry into the government’s white paper on defined benefit (DB) pensions policy.

TPR chief executive Lesley Titcomb said the balance of priorities between members and employers in the past “was not always right”. The politicians’ report underlined the significant changes already made at the regulator, but there was more work to do, she said.

Carillion vans

A tougher regulator

“We are now a very different organisation,” she added. “We are clearer about what we expect, quicker to intervene and tougher on those who do not act in the interest of members.

“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 DWP 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.”

TPR plans to increase its staff by 12% this year and to become “a clearer, quicker and tougher regulator”, it unveiled in its recently published corporate plan for the 2018-21 period.

Patrick Bloomfield, partner at Hymans Robertson, called for the government to review TPR’s “irreconcilable objectives to promote sustainable economic growth and protect pension schemes and the PPF”.

“Carillion’s legacy will be to toughen TPR,” Bloomfield added. “Corporate failure has always been the catalyst for pension legislation… It is not the pensions industry’s place to be apologists for its regulators. The sad reality is that thousands of examples of good practice are undermined by a few spectacular failures. The consolation is that we can use these failures to raise the bar.”

Martin Hunter, principal at consultancy group Xafinity Punter Southall, said much of the activity reviewed in the select committees’ report was from a few years ago, in particular the time of the 2008 and 2011 scheme valuations. He said the regulator would argue that its culture and approach had changed and would do so even more subsequent to the DB white paper.

In the white paper in March the government proposed new powers for TPR, including an expanded remit to fine directors and companies to tackle irresponsible activities that might hurt pension schemes, and a tightening of the rules around mergers and acquisitions.

Carillion’s downfall: a timeline

Carillion was forced into liquidation in January with a number of pension schemes it sponsored entering the assessment period for entry into the Pension Protection Fund (PPF). The combined pension deficit was £804m (€911.6m) according to the company’s last annual report.

The regulator had “failed in all its objectives regarding the Carillion pension scheme”, according to the committees. They said the schemes might have ended up in the PPF regardless of TPR, given the company’s poor management, “but the regulator should not be spared blame for allowing years of underfunding by the company”.

15 January: Carillion declared bankrupt; pension schemes enter PPF assessment

Robin Ellison

Robin Ellison appearing before MPs in January

30 January: Trustee chair Robin Ellison is quizzed by politicians but rejects claims that his board let the company wriggle out of contributions

30 January: FRC chief executive Stephen Haddrill is also questioned by politicians over the quality of accounting standards

20 February: Committee chairman Frank Field accuses Carillion executives of being “contemptuous of their pension obligations” as a series of documents relating to the pension schemes and going back more than a decade are published

22 February: TPR’s Nicola Parish says the supervisor is pursuing all avenues to reclaim money for the Carillion pension schemes, including action against individual directors

7 March: Asset managers Aberdeen Standard Investments and BlackRock promise to improve their stewardship rules 

19 March: The UK government’s proposals for DB reform include criminal sanctions against company directors who fail to fund their schemes 

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  • Carillion vans

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