12th June 2018 Picking up the pensions pieces after Carillion

The joint Businesses and Energy & Industrial Strategy (BEIS) and Work & Pensions Committees’ report on the demise of Carillion has heavily criticised the Pension Regulator (TPR) in no uncertain terms. TPR’s current chief executive, Lesley Titcomb, who has made repeated appearances before the committee, has subsequently confirmed that she will be stepping down at the end of her contract in February 2019. There is unlikely to be a long list of candidates willing to replace her.

Carillion collapsed in January under the weight of a £1.5bn debt pile. It was responsible for 13 defined benefits pension schemes, 11 of which are expected to enter the Pensions Protection Fund (PPF), with an aggregate estimated deficit of £800m. Members in those schemes will have their pensions subject to a cap and may have them scaled back.

The company and the trustees had a long history of failing to reach agreement on the level of affordable contributions due under the schemes’ triennial actuarial valuations. The trustees had repeatedly asked TPR to intervene and, while there were numerous meetings held with both trustees and company over many years, none actually resulted in any regulatory action being instigated against Carillion.

While threatening many times to use its statutory power to impose contributions on the company, TPR never followed through on those empty threats. By the time of its profit warning in July 2017, Carillion had somehow managed to persuade the trustees to agree to the deferral of its contributions so that the company would avoid insolvency, But this ended up only delaying the inevitable.

In evidence given, TPR had to admit that it has never imposed a schedule of contributions where the trustees and employer have failed to agree on funding. In 13 years, it has issued three warning notices about setting employer contributions, but none of these resulted in this power being used. TPR also argued that it should not prevent companies from paying dividends ‘if that is the right thing to do’.

According to the report, TPR failed in its statutory objectives to reduce the risk of pension schemes falling into the Pension Protection Fund (PPF) and to protect members’ benefits. Since publication, TPR has announced an investigation to see if it could use its anti-avoidance powers to require Carillion or its former board members to pay money into the schemes. But Carillion has not substantive assets left and individual directors will not have deep enough pockets to make any difference to members’ benefits – so this does look like too little too late from a regulatory perspective. And not much of a deterrent either.

TPR is characterised in the report as a ‘paper tiger’. The solution to this is for it to be ‘clearer, quicker and tougher’ as outlined in the Department of Work and Pensions White Paper released on March and TPR’s recently published Corporate Plan for 2018-2021. But what does this actually mean in practice?

Well it seems that in 2019 TPR is likely to be given the possibly retrospective power to issue large fines to companies and directors who deliberately put a pension scheme at risk and have increased powers of investigation. These are relatively easy powers to add to existing legislation, and fines are likely to be perceived as a greater threat than the use of its more complicated (and time consuming) anti-avoidance powers.

Also proposed is a new criminal offence of wilful or grossly reckless behaviour in relation to a pension scheme. More director disqualifications due to pensions problem are likely. And we are promised a new TPR code on defined benefits funding with new guidance on the meanings of ‘prudence’ of actuarial assumptions used in scheme valuations and the ‘appropriateness’ of recovery plans setting out contribution levels and payment periods.

Following the report and White Paper, it is also possible that more clearance applications will be made relating to commercial activity (M&A, dividends etc), reversing the steep decline in seeking clearance from 263 in 2005/06 to 10 in 2016/17. All of the above could mean that the one-third of TPR’s resources allocated to frontline regulation for 2018/19 will end up very stretched.

Anne-Marie Winton, Partner

This article was published in Accountancy Daily 

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