Risk & Economy » Audit » Support Pension Regulator in wake of Carillion fiasco

Carillion is back in the headlines after a joint select committee report was published which was highly critical of the corporate culture which led to the firm’s collapse and to the watering down of thousands of workers’ pension benefits.

A myriad of failings were identified, with former executives, including the finance director, being singled out for their role in proceedings. Blame focused on the strategy and corporate governance, but also called out what the committee seemingly perceive to be chronic underfunding of the defined benefit pension schemes. These types of scheme promise a retirement income backed by the sponsoring employer, unlike modern defined contribution pensions where pension pay-outs are based on how much money is paid in and how well the investments perform, but without any guarantees or promises. The Finance Director, Richard Adam, is reported to have considered funding the pension schemes a ‘waste of money.’

You may well ask how this was all able to happen, and this is exactly the question the committee asked of the Pension Regulator. The findings make for pretty uncomfortable reading, as they are accused of allowing the Carillion pension schemes to be hollowed out on their watch.

The report refers to the Regulator’s challenge as like a ‘paper tiger’, which tells you all you need to know about how effective the committee thought they were. A ‘tentative and apologetic’ approach is alleged to be ingrained at the Regulator and the committee doubts that the people in charge can turn things around.

Punchy findings for sure, but perhaps a little harsh. For starters, the organisation is one that is changing, and is looking to build closer links with the Financial Conduct Authority (FCA) which themselves are responsible for regulating huge parts of the pension system. The government is also already taking steps, through its Defined Benefit White Paper, to strengthen the Regulator’s hand for the future. This includes the ability to man-mark those schemes that are in greatest danger of blowing up. This won’t cheer up members of the Carillion pension scheme who will see their retirement income watered down, but it means that defined benefit pensions, which are a fundamental plank in the pension system, continue to be protected.

The cost of providing defined benefit pensions has been soaring in recent years, as guaranteeing income for life has become more expensive and we are living longer than we were expected to years ago.

Difficult act

In the face of strong criticism, it is important to remember that the regulator has a very delicate balance to strike. They must protect scheme members’ pension interests and also ensure British industry does not face an unduly onerous burden in conducting its day to day business activities, which ultimately pays salaries and retirement contributions for current staff.

There is also a question mark of whether actually funding the pension scheme more heavily would have made any difference at all. Defined benefit pensions are only as strong as the company that backs them, meaning if the company backing the pension is no longer around, they will not be able to pay your pension.

The lifeboat for the UK’s defined benefit schemes is the Pension Protection Fund (PPF). The confidence of this body to act as backstop for failed schemes is unbelievably crucial to a well-functioning pension system. If Carillion had paid more into the pension it may just have ended up with more assets passing over to the PPF. This is not a bad thing, but when all boiled down, would not necessarily improve things for the thousands of Carillion pension members who will be affected. Only if the monies in the scheme were large enough that benefits could be secured that were better than the PPF could offer, would there be a benefit to members. Of course, this is no excuse for poor corporate governance.

With all of the furore over defined benefit pensions, it is easy to forget that modern defined contribution pensions are how the vast majority of today’s workers save for their retirement. The Regulator has coped admirably with the enormous task of bringing in ground-breaking auto-enrolment rules. These rules mean your employer automatically puts you into a workplace pension if you are old enough and earn enough, and have revolutionised the way we save for retirement.

It is rare to come across employers that share Carillion’s view that paying into pensions is a ‘waste of money.’ Most forward thinking businesses recognise that in the future leaving the workforce will be less a lifestyle choice and more likely come down to affordability. Companies that pay sufficient sums into employee pensions, help them understand how to get the most from their retirement planning, or both, will be better placed to sidestep problems in the future.

The Regulator has taken a tough stance with employers who have ignored their automatic-enrolment responsibilities. They deserve praise for this and this may be a sign of a newly emerging Regulator, one that is bigger, tougher, and one not to be taken lightly.