17 May 2018
Carillion – select committees put the boot in
Parliament’s Work and Pensions and BEIS committees have published the report on their joint inquiry into the collapse of construction company/outsourcer Carillion.
Much of the report is a catalogue of the sorry tale of Carillion’s demise. Extreme and personal criticism is meted out to the members of the Carillion board and also to advisers and regulators. Auditors come in for particular criticism and a key recommendation of the report is that the “Big Four” audit firms be referred to the Competition and Markets Authority with a view to a break-up being enforced.
Most of the focus of the report is about the failings of corporate governance, but Carillion also left around £2.6bn of underfunded pension liabilities in 13 defined benefit pension schemes which are now being picked up by the PPF. On this the report speaks for itself, with strong criticism of the Pensions Regulator:
- “The pension trustees were outgunned in negotiations with directors intent on paying as little as possible into the pension schemes. Largely powerless, they took a conciliatory approach with a sponsor who was their only hope of additional money and, for some of them, their own employer. When it was clear that the company was refusing to budge an inch, they turned to the Pensions Regulator to intervene”
- “The Pensions Regulator’s feeble response to the underfunding of Carillion’s pension schemes was a threat to impose a contribution schedule, a power it had never — and has still never — used. The Regulator congratulated itself on a final agreement which was exactly what the company asked for the first few years and only incorporated a small uptick in recovery plan contributions after the next negotiation was due. In reality, this intervention only served to highlight to both sides quite how unequal the contest would continue to be”
- “The Pensions Regulator failed in all its objectives regarding the Carillion pension scheme. Scheme members will receive reduced pensions. The Pension Protection Fund and its levy payers will pick up their biggest bill ever. Any growth in the company that resulted from scrimping on pension contributions can hardly be described as sustainable. Carillion was run so irresponsibly that its pension schemes may well have ended up in the PPF regardless, but the Regulator should not be spared blame for allowing years of underfunding by the company. Carillion collapsed with net pension liabilities of around £2.6 billion and little prospect of anything being salvaged from the wreckage to offset them”
- “The case of Carillion emphasised that the answer to the failings of pensions regulation is not simply new powers. The Pensions Regulator, and ultimately pensioners, would benefit from far harsher sanctions on sponsors who knowingly avoid their pension responsibilities through corporate transactions. But Carillion’s pension schemes were not dumped as part of a sudden company sale; they were underfunded over an extended period in full view of TPR. TPR saw the wholly inadequate recovery plans and had the opportunity to impose a more appropriate schedule of contributions while the company was still solvent. Though it warned Carillion that it was prepared to do, it did not follow through with this ultimately hollow threat. TPR’s bluff has been called too many times. It has said it will be quicker, bolder and more proactive. It certainly needs to be. But this will require substantial cultural change in an organisation where a tentative and apologetic approach is ingrained. We are far from convinced that TPR’s current leadership is equipped to effect that change”
On dividends the report notes that from 2011 to 2016 the company paid out £441m in dividends compared to £246m in pension deficit recovery contributions. The report further notes that, unlike the payment of dividends, “funding pension schemes is an obligation” and welcomes the fact that the BEIS Department is considering “whether companies ought to provide for company pension liabilities, before distributing profits”.
There had been speculation that the report would call for the Pensions Regulator to be abolished. The report falls short of that and confines itself to howling at the moon about the performance of the Regulator.
No real policy fixes are suggested, but this appears to be the approach taken by the Committees when reporting on specific corporate failures. No doubt we will see a shopping list once the Work and Pensions Committee reports on its DB White Paper inquiry (see Pensions Bulletin 2018/16), the deadline for responses to which is this Friday.
Separately, we may yet see some regulation from the Business Department over the payment of dividends by companies with DB pension deficits.
More resources flow to the “clearer, quicker and tougher” Pensions Regulator
This year’s corporate plan from the Pensions Regulator gathers up a number of themes that will be familiar to those following the Regulator’s fortunes, and confirms the additional resources that the Regulator will be given in order that it can respond to its ever-changing risk landscape.
Staffing levels will increase significantly over the three years ending on 31 March 2021, as will the costs borne by levy payers. On the latter, the DWP has agreed additional expenditure of £9.8m in 2018/19 and £12.2m in 2019/20 compared to the amount set out in last year’s corporate plan (see Pensions Bulletin 2017/18). There will also be additional expenditure for the Regulator’s auto-enrolment activities in both years.
Whilst the DB White Paper is mentioned in passing, much of this additional activity appears to flow from agreement having been reached with the DWP that amongst other things:
- There will be more intervention across DB, DC and public sector schemes
- Improved standards of governance, record-keeping and data will be sought across the whole pensions landscape; and
- DB regulation will become more segmented, with a particular focus on small DB schemes alongside continued pro-active engagement with larger schemes
This is reinforced by a modest shift in how the Regulator expects to deploy its resources, with 34% in frontline regulation as compared with 30.5% proposed last year.
As in previous years, this year’s corporate plan is light on specifics and heavy on generalities, but it does seem that the Regulator wishes to change not only what it does but how it goes about it. Now that the additional funding has been agreed, there would seem to be no excuse should the latter not come about.
Master Trust Regulations laid before Parliament
Lengthy regulations that set out much of the legislative detail of the DC master trust regime have now been laid before Parliament in draft form. They follow on from the Government response to a consultation draft of these regulations in March (see Pensions Bulletin 2018/12).
As expected, the draft Occupational Pension Schemes (Master Trusts) Regulations 2018 are little altered from the consultation draft. They do contain the now settled authorisation fees – £41,000 for existing schemes and £23,000 for new schemes.
The intention is that once affirmed by Parliament these regulations will come into force on 1 October 2018.
The DC master trust market continues to expand with it now being reported that membership stood at 9.9 million by January 2018, compared to just 200,000 in 2010. However, there are now clear signs of consolidation amongst the 80 or so master trusts currently operating. The Regulator is also forecasting that there will now be few new entrants to the market – potentially as little as one or two a year.
The Government takes a step towards the reform of civil partnerships
The Government has, after considerable delay, taken the next step towards the potential reform of civil partnerships, which may have implications for state and occupational pensions.
The Civil Partnership Act 2004 only applies to same sex couples – the then Government’s view at the time of legislating being that since opposite sex couples have the option of marrying, it was not appropriate to extend civil partnership arrangements to them.
Following on from the Marriage (Same Sex Couples) Act 2013 a formal review of the Civil Partnership Act was timetabled for delivery in the winter of 2014, but has been much delayed.
Now the Government has issued a policy paper setting out how it will gather the information it needs to bring forward proposals for the future of civil partnerships. The Government believes that four elements of research are required to help assess whether there continues to be demand for civil partnerships amongst same-sex couples now marriages are available to them, and whether there is demand for civil partnerships amongst opposite-sex couples. At the earliest, the Government anticipates being able to consult on the future operation of civil partnerships in 2020.
This is a potentially important development as we could yet see the civil partnership route closed off for same-sex couples, whilst becoming available for opposite sex-couples. It is the latter which will have implications for state and occupational pensions – particularly those set up on a DB basis.
Now that this step has been taken, it could also be the case that support for the private member’s bill introduced at the end of January (see Pensions Bulletin 2018/07) and which is currently waiting for a time slot for its Committee stage, will ebb away.
CMA looks into the gains made by engagement
The Competition and Markets Authority has issued yet another working paper as part of its investment consultancy and fiduciary management market investigation.
This paper sets out the analysis the CMA has undertaken to examine whether pension schemes that are more engaged with the market receive better outcomes (in terms of price) than those who are less engaged.
The CMA first notes that the analysis of responses received to its Market Information Request issued in October 2017 appears to show that negotiation of fiduciary management and investment consultancy fees is a key feature of the industry and also indicates that engaged schemes are better able to challenge firms’ prices, or are more likely to be considered “at risk” by firms and therefore offered higher quality terms and service.
The emerging findings from the more detailed quantitative analysis carried out shows that, considering three measurable indicators – tendering, using a third party evaluator and having a professional trustee – a significant proportion of pension schemes do not appear to be engaged. The analysis also indicates that:
- Engaged schemes pay less than disengaged schemes for both fiduciary management and investment consultancy; and
- Engaged schemes pay significantly less, and disengaged schemes significantly more, when schemes transition into fiduciary management with the same provider as they used for investment consultancy services
The CMA concludes that this is indicative that the market is not working well for disengaged schemes, or schemes facing barriers to engagement. Comments are invited on the paper by 24 May 2018.
The tone of this paper and the findings set out within it may indicate that this is an area in which the CMA decides it needs to intervene, but we will need to wait for the provisional decision report in July to find out.
Pensions Regulator expects trustees to monitor transfer activity amidst concerns over the quality of advice to members
Concerns over the quality of advice in relation to DB transfers has become headline news recently after a series of allegations of bad practice, most notably concerning the British Steel Pension Scheme many of whose members were targeted by unscrupulous advisers and introducers. The Pensions Regulator has also recently said that it expects trustees to monitor transfer activity closely.
LCP has been able to help our clients with this for some while by sharing our transfer activity analysis with them. We continue to monitor the pattern of transfer quotations and payments for the DB schemes we administer, and the practices adopted by trustees, to see how things are changing following the introduction of Freedom and Choice in April 2015.
Key findings from our latest quarterly update include:
- Transfer payment activity shows no sign of slowing down, with our most recent analysis showing that more than one-third of transfer values were paid out and this figure is even higher (43%) if we only look at members aged over 55
- In contrast, however, transfer value quotation rates during Q1 2018 actually fell for the first time since we began our analysis in 2014
- Just under 20% of the schemes we administer now offer the option of partial transfers and there are early signs in 2018 that members are becoming more interested in taking up this option
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.