Carillion Finance Director: funding pension obligations was 'waste of money'

• Inquiry: Carillion
• Work and Pensions Committee
• Business, Energy and Industrial Strategy Committee

In the session, Work and Pensions Chair Frank Field cited the Trustee's understanding that former Finance Director Richard Adam thought funding pensions was a "waste of money".

Key points from the minutes:

Low prioritisation of pension schemes and Company not paying what it was otherwise believed it could afford:

• "The Trustee Representatives said that the Trustee does not believe it is being offered contributions reflecting the Company's maximum affordability and is of the opinion that the Schemes are falling further behind the Company's other stakeholders as time goes on."
• "Since 2008 the Company has shrunk by 20% but cash generation has significantly increased. However, a large amount (and nearly all) of this cash was spent on increasing dividends and the Eaga acquisition."
• "The Regulator queried why the Company was reluctant to accept what, on the face of it, appeared to the Regulator to look like a reasonable proposal from the Trustees (referring to the Trustee's proposal of 26 March 2013. RE's understanding was that the Finance Director, Richard Adam ("RA"), considered funding pension schemes to be a "waste of money", particularly in respect of deferred members who did not actively contribute towards the business. RE thought that RA may consider one of his key roles to be the preservation of cash. DG supported RE's understanding and explained that RA would consider an escrow arrangement or back-end loaded contributions on the basis they would unfairly burden his successors”.

Company wanting lower deficit based on "aggressive investment returns" and "a degree of re-risking"

• "The Company wanted to reduce the Trustee's original deficit figure of £770 million by approximately £200 million, based on 'more realistic' assumptions relying on relatively aggressive investment returns and including no element of de-risking (and to some extent including a degree of re-risking). The Trustee would not be able to agree to this far lower deficit without sufficiently increased cash contributions."

Trustee wanting some link to earnings or dividends

• "It was explained to the Regulator that the Trustee would like to share in any increase in profitability and cash flow of the Company post 2014 e.g. a contribution linked to earnings or dividends. The Trustee would agree to such profit sharing to fall away should it become apparent that a minimum level of profitability was not met. It would also consider the use of escrow arrangements. However, the Company is unwilling to consider such methods."

Company not giving an inch

• "In the opinion of the Trustee, the process has been protracted because the Company is not willing to negotiate. The Company had not moved from its opening negotiating position whereas the Trustee had moved from what it considered a reasonable position (its original proposal) to what it considered marginally acceptable (the proposal sent on 26 March 2013)."

Different picture for different audiences

• "DG said that there was a disconnect between what the Company was telling the Trustee and what it was telling the City."
• "The Company's accounts indicated modest borrowing. However, it was noted by the Trustee Representatives that this may be 'window dressing' with RH explaining that the Company would hold back significant payments at half and quarter year ends for this purpose."
• "The Regulator queried whether the net debt position of the Company would be picked up by the City. RE and DG were unconvinced City analysts pick up on the true net debt position."

Passive conclusions drawn by TPR

• "The Regulator confirmed that, in general, it is not comfortable with recovery plans increasing whilst dividends are being increased."
• "The Regulator would like to be kept updated as to any further discussions and negotiations between the Trustee and the Company."

Also published is an extract from a meeting of the Pension Trustees, 8 Jan 2014, at which the Trustees are weighing up a reduced offer of £42m vs handing over to TPR, with concern about how long that would take.

Key points from the extract of pages 5-6 on 2011 Valuations:

• TPR becoming sympathetic to the Company's position based on presentation from Richard Adam – "no pushback from TPR"
• "In the absence of an agreement it was noted that tPR could refer the matter to the Determinations Panel to impose a schedule of contributions but it was estimated this could take 2 to 3 years."
• "The Trustee therefore needed to consider whether it was willing to reduce its minimum position or whether effectively it should hand over to tPR in the hope that the matter would be referred to the Determinations Panel which would reach the same conclusion recognising the length of time this could take to enforce. In the meantime the existing schedules of contributions would remain in place."

The Committee is publishing some graphics depicting progress on Carillion's recovery plan, and comparison to wider recovery plans

Backloaded recovery plan which went along with sponsor's wishes for first few years

Carillion proposed deficit recovery contributions of £33.4m per year for 16 years totalling £568m. TPR claim they secured £85m in extra funding contributions (i.e. the agreed schedule), when the trustees proposal was asking for £342m extra (£65m p.a. for 14 years).

This extra money was, however, backloaded. Another recovery plan would be required in less than three years. For the intervening years, contributions were those in the company's "take it or leave it" offer which forced the trustees to formally request intervention from the Regulator.

The Carillion deficit was an outlier

• The latest TPR analysis of recovery plans, published in June 2017, covered valuations conducted between September 2014 and September 2015 (and therefore due to be agreed by December 2016).
• TPR told the Committee that it judged Carillion to be in "covenant group 2", meaning it "tended to strong" as a scheme sponsor.
• The Carillion recovery plan signed off in December 2013 (the 2011 valuation) was 16.4 years long.
• 95% of deficit recovery plans in covenant group 2 were under 14 years long. The average recovery plan in even the weakest covenant group was under 10 years.

Carillion's recovery plan was a major outlier:

Other analysis in the TPR report shows that 41% of DB schemes increased their recovery plans following valuations, compared to 28% that reduced the length of recovery plans.

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